Elective Deferral Plans
Deferring the receipt of income and delaying the payment of taxes can allow an individual to increase the effective rate of return on an investment. However, IRS regulations limit the amount an individual may defer into a qualified retirement plan. These deferral limits reversely discriminate against your highly compensated employees.
The chart below shows the current effect of qualified plan limitations on varying levels of income.
A nonqualified elective deferral plan allows designated participants to defer current income (all types), just as they do in a qualified 401(k) plan, but without limitations. Distributions can also be requested at a specific time in the future, not necessarily at retirement. Distributions made prior to age 59 ½ are not subject to the 10% penalty tax that applies to 401(k) plans.
Designing a Plan
Begin with a Basic Plan Design
Simple Executive Deferral Plan:
Eliminate the compliance problems of 401(k) plans by carving out top executives and allowing them to defer a portion of annual salary and/or bonus, without limits. Restore parity with rank-and-file employees while limiting corporate cost to the deferral of the tax deduction.Enhance the Plan to Achieve Corporate Goals
Employer Contributions:
Implement pay-for-performance plan designs with contingent, variable company matches or profit sharing contributions. Specified goals can be tailored for each plan participant or used to promote a team approach.Mandatory Deferral of Bonus:
Promote an ownership outlook among key executives.Vesting Of Employer Contributions:
Create golden handcuffs by linking a portion of the benefit payment to remain with the company until normal retirement or other appropriate time horizon.Approach Plan Design by Defining the Benefit
Supplemental Executive Retirement Plan (SERP):
Promise to pay key executives a fixed percentage of their final income (or fixed dollar amount) for a fixed number of years at retirement. Augment this simple design with vesting provisions and pre-retirement death benefits.Equity Surrogate Value Realization Plans:
Allow executive participation in value creation events without the use of stock.Advanced Plan Designs
Interim Distributions:
Allow participants to defer income until a time prior to retirement date. This allows for better financial planning (e.g. for education costs, purchase of a home, etc.)