Business Benefits Group can work with companies to set up comprehensive benefits, including deferred compensation plans. By analyzing an employer’s needs, one of our Benefits Consultants can help a business establish a deferred compensation plan as a way to attract and retain top talent. Companies who work with BBG will often gain a competitive advantage in their ability to draw highly skilled employees, and can save both time and money in administering the plan.
Deferred compensation is a type of employee benefit that is most often used to attract highly sought after employees, such as executives or officers. Deferred compensation is an agreement to provide that employee a part of his or her income at a later date. This delay in payment also delays taxation—thereby giving these employees an opportunity to minimize their tax liability. Deferred compensation can be arrange in a number of ways, such as retirement plans, stock options, and pension plans.
There are two primary types of deferred compensation: nonqualified and qualified. The most significant distinction between the two types of plans is in how they are taxed. They are also governed by different laws, and employers tend to use nonqualified and qualified plans in different ways. Deferred compensation plans are subject to both state and federal regulations.
Nonqualified Plans for Flexible Employees, Higher-Risk Plans for Valuable Employees
Nonqualified deferred compensation plans, known as NQDC or 409(a) plans, are agreements between employers and employees. In many cases, these plans are offered to highly-compensated employees such as CEOs and other executives, officers and high-level managers. These plans are generally taxed based on what type of compensation is used, which can range from stock or stock options, deferred savings plans and supplemental executive retirement plans (SERPs). Taxes are paid on this income when the income is realized by the employee, such as when he or she cashes in stock options.
NQDC plans are arguably flexible, allowing companies to offer them to employees or independent contractors. They are governed solely by contract law. There are no limits on the value of these plans, and the parties are oftentimes free to negotiate the contract terms, including different rules and incentives for performance. In many cases, NQDC include clauses that requires employees to forfeit the compensation if his employment is terminated voluntarily or involuntarily, or non-compete clauses. Because these terms are somewhat common in NQDC plans, they are often referred to as “golden handcuffs,” as employees are required to remain at the company for a certain time period. Compensation under NQDC plans is typically paid when an employee retires, but may be paid when other events occur, such as a change in ownership or the death or disability of one of the parties. Early distribution of a NQDC plan may result in heavy tax penalties.
NQDC plans may be a viable option to employers who want to meet the salary expectations of a valuable employee incrementally. For example, if a company wants to bring on a Chief Financial Officer who demands a five million dollar salary, they may be able to provide a one million dollar salary, with four million dollars in deferred compensation. For employees, NQDC plans can help them reduce their tax burdens and save for retirement.
Importantly, NQDC plans are not protected from creditors in the event of bankruptcy. The funds could be seized in this situation, making them a risky bet for employees in cases where the employer is having financial difficulties or where the compensation is not set to be paid for a significant period of time.
Qualified Plans and Secure Savings
Qualified deferred compensation comply with the Employee Retirement Income Security Act (ERISA). Theses plans can generally be offered to all employees, regardless of their compensation level. They may include any number of retirement or pension plan options, such as 401(k), 403(b) and 457 plans. Most employees are familiar with these types of plans, which are commonly offered by employers of all sizes.
Qualified deferred compensation plans typically involve employers making contributions to a retirement account. This money grows tax-free, and employees do not pay income tax on the gains until they withdraw the money. This helps employees reduce their overall tax burden, because most employees do not make withdrawals from the accounts until they retire and have a lower income. There are usually some restrictions on these plans, including limits on contributions and an income limit for eligibility. There are also high penalties for early withdrawal of plan funds.
If a company offers a qualified deferred compensation plan, it must be made available to all eligible employees. These plans offer greater protection than non-qualified plans, as they are protected if an employer files bankruptcy. This makes qualified deferred compensation plans a more secure option for most employees.
Benefits of Deferred Compensation Plans
Both qualified and nonqualified plans offer a method for employees to lower their immediate tax burden by shifting income to a later date, when the employees are in a lower tax bracket. Qualified plans offer additional tax advantages, as the funds can grow tax-free and are not taxed until they are withdrawn. Nonqualified plans do not have as many tax benefits, but they offer the possibility of greater flexibility and higher contributions. For employers, deferred compensation plans may aide employee recruitment and retention. It may also allow for employers to shift their immediate compensation obligations to a later date in time. This may include deferring certain employee salary requirements to a later date in time.
Advantages of Working with A Benefits Consultant
Deciding on how to compensate employees and how to establish a retirement plan can be tricky for employers. There are numerous options available, including deferred compensation, and each has its own benefits and requirements. BBG can help employers pick a benefits package that works with their needs and budget, helping them meet their goals in hiring and retaining employees. One of our experienced Benefits Consultants can help a company put together an attractive deferred compensation package that is fully compliant with all applicable laws and regulations, and can assist a business in administering the details of the plan.