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I will be hosting both a free online webinar and a complimentary luncheon seminar at Capital Grille (view map) for the month of May with Bob Nienaber, CEO of benefitRFP, Inc. who is a leading expert on executive compensation plans.

Both events will cover the following topics:

• Modern-Day Executive Compensation Strategies
• Recruiting, Retaining, and Retiring Top Talent
• Non-qualified Deferred Compensation Plans (NQDC)

CLICK HERE to download the pdf invitation to register for the webinar or luncheon event. Seating is limited!

Do you have a large family business? Are you worried about retaining your key executives?  Non qualified deferred compensation plans may be what can help you with this ongoing challenge. And, your firm is more in luck than are the small family businesses. You see, the small family businesses disregard NQDC because these plans don’t provide a tax deduction until disbursement. But larger family businesses are usually big enough to worry less about such tax matters and more about retaining key employees, especially nonfamily executives. Because qualified plans are limited in scope, many of the larger businesses use nonqualified plans to compensate and retain executives who are not members of the family.

You may already know that NQDC plans allow key executives to defer a portion of their salary until a later year — much like a 401(k) plan, but without deferrable amount limits and the need to cover non-key employees. Executives can retrieve the income in later years when their tax brackets are lower or after their deferred compensation accounts have grown significantly. Sounds interesting, doesn’t it? Let’s take look at the details. I’ll try not to be too technical, but I can always answer questions through emails or phone calls.

Tax Rules

The IRS strictly regulates nonqualified deferred compensation. To avoid taxation, executives must elect to defer their pay before they actually earn it. The IRS also requires executives to choose the payout method before the salary is deferred. Then the executive and the company must sign a contract stipulating the terms. This sounds easy enough so far.

Nonqualified deferred compensation plans must also include a substantial risk of forfeiture. When that risk is gone, the amounts deferred are taxable to the executive, even if he or she does not actually receive them. Usually these plans provide funds for events such as retirement, disability, termination or changes in company ownership. Some plans allow the executive to take his or her money earlier if a penalty is paid.

Unlike a qualified plan — with which employees can usually roll over their money to another plan or an individual retirement account and defer taxation until at least age 70 — executives must accept income from a nonqualified plan with payment. Some plans allow executives to push back the payment date further than originally planned, but guidelines for these exceptions vary.

Reporting Rules

Although the NQDC plan I am describing is not subject to Employee Retirement Income Security Act (ERISA) rules, some reporting requirements do exist. The plan administrator must file an IRS Form 5500 series annually to report the amounts held for the executive. However, because these plans apply only to executives, the Department of Labor (DOL) waives the reporting requirements if the company files a statement with the DOL within 120 days of implementing the compensation plan.

When the deferred compensation is paid, the company must report the income on a W-2 form or risk losing the tax deduction. The executive reports the income in the year received. Whether the amount paid is subject to FICA and Medicare tax withholding depends on when the funds became payable.

Keep Them Happy

Because your competitors may have NQDC plans for their key executives, you should consider providing a similar plan to keep yours happy and to keep them in their key positions at your firm. After all, the typical qualified plan, as you know, often has too many limitations to satisfy a key executive. When properly structured, a NQDC plan provides better compensation benefits than a qualified plan.

My team and I would be happy to discuss your concerns about this topic or other family business issues.     You may remember that I have covered the many aspects of NQDC plans previously in my blog posts, so I invite you to take a look at my previous posts if this is something important to you this year and beyond.  You can call me at 732-974-6400, contact me at tom@rewardexecs.com    or visit us at www.rewardexecs.com

See you next time!

Tom

Securities offered through American Portfolios Financial Services, Inc. Member: FINRA, SIPC. Investment Advisory services are offered through American Portfolios Advisors, Inc., an SEC Registered Investment Advisor. American Executive Benefits, Inc. is not an affiliate of APA or APFS.   

 Disclosure: If legal, tax, or other expert assistance is required, the services of a competent professional should be sought. This article is for informational purposes only.

Many companies continue to struggle in our uncertain economic environment, despite having taken drastic cost-cutting measures. These necessary actions can have a dramatic effect on your key employees, in terms of their compensation and your firm’s ability to retain and motivate them. Is your business currently facing key employee retention challenges?

Hello, I’m Tom Froehlich, founder and president of American Executive Benefits, and we understand the many difficulties you face in recruiting, rewarding and retaining your top executives, senior managers and sales staff. I’ve talked with many business owners about their fear of losing key people—including the retiring baby boomers. They realize that the loss of leadership and experience can create major problems for their firm, including, of course, the immediate financial impact and the overall morale of the company. Speaking strictly from a financial point of view, current industry studies state that companies have reported that their recruitment, training, lost business, severance pay and other benefits cost an average of 2-1/2 times an executive’s salary and 2 times a manager’s compensation in terms of replacement costs. That’s staggering! When you look at these hard costs at face value, it makes a lot of sense to………”get out the golden handcuffs!!!” and put a nonqualified deferred compensation plan in place.

A non-qualified plan is a perfect example. This is a great way to align your key employees’ performance to your business objectives. Your contributions to the plan will help you accomplish this.  “Golden handcuffs” are actually structured bonuses and incentives that have vesting schedules… These plans motivate your top talent to stay with your organization. They can be very appealing especially if you offer retirement features such as restoring company match benefits disallowed in qualified plans due to compensation limits, for example.  Another great benefit of the plan is that since they are governed to a lesser extent by ERISA than qualified plans, your firm will have greater control and flexibility.

There are several very good designs available which my team and I can discuss with you. These Nonqualified deferred compensation plans can be offered exclusively to your key executives or in combination with your existing 401(k)/profit sharing plan. Due to changes around expensing rules, many companies now also offer these plans as an alternative to stock options or restricted stock plans. As an employer, you will have more peace of mind after you gain control over your compensation costs and understand the options you have for recruiting, rewarding and retaining your key employees.

I truly believe it is crucial that your contributions in certain compensation plans are viewed as an investment, NOT as a cost or an expense. After all, your key people are your most important asset, right? Call us for an evaluation of available executive benefit plan strategies at 732-974-3770 or tom@rewardexecs.com  for more information on the various “golden handcuff” plans that are available.

For those who have been following my blog posts on a regular basis, I hope I have given you the information you need to make important decisions about Non Qualified Deferred Compensation plans for your highly compensated executives. I recently received a few emails from owners of companies who asked me to list— in a simple format—just the pros and cons of these plans.

 So, I have prepared a list that will help those of you who need this as talking points for your staff, your executives and your business partners:

 Advantages of Nonqualified Deferred Compensation Plans

1. Employers who use life insurance to finance nonqualified deferred compensation plans, are not taxed on the earnings, since the accumulation of cash value is not subject to tax until distribution.
2. Employees, who are covered under a nonqualified deferred compensation plan, do not owe taxes on the benefits until they receive a distribution.
3. Nonqualified deferred compensation plans provide great flexibility, compared to qualified plans. Employers have the freedom to name the people who will be covered, choose the levels and conditions of coverage, specify the forfeiture options and place any restrictions.

 Nonqualified Deferred Compensation Plans – Disadvantages

1. The employer’s income tax deduction is deferred until the year in which income is taxable to the covered employee.
2. The plan assets are available to creditors in the event of a bankruptcy.
3. To use and take advantage of the nonqualified deferred compensation plans, an employer has to meet certain status requirements.  It typically does not make sense for partnership or an S corporation to offer a nonqualified plan for its “owner” employees.
4. Non-profit and governmental organizations are subject to restrictive rules of utilizing the nonqualified deferred compensation plans.

 My team and I can provide advice on NQDC plans for your highly compensated employees as well as for your middle managers. We can also provide consultative support around effective plan financing techniques and cost recovery opportunities.  You can call me at 732-974-6400, contact me at tom@rewardexecs.com    or visit us at www.rewardexecs.com

  See you next time!

Tom

 Securities offered through American Portfolios Financial Services, Inc. Member: FINRA, SIPC. Investment Advisory services are offered through American Portfolios Advisors, Inc., an SEC Registered Investment Advisor. American Executive Benefits, Inc. is not an affiliate of APA or APFS.   

 Disclosure: If legal, tax, or other expert assistance is required, the services of a competent professional should be sought. This article is for informational purposes only.

In today’s posting, I want to talk about “Top Hat” plans. I haven’t gone into much detail about them in previous postings, but it’s important to understand exactly what they are and what are their eligibility requirements.

 A common concern of employers sponsoring NQDC plans is whether they have satisfied the top-hat exemption requirements of ERISA. Unfortunately, the Department of Labor has never issued regulations regarding top-hat issues. So, what do you do?  Generally, you must rely on the guidance from court cases interpreting the top-hat definition and on industry “best practices” that have evolved from those cases. I’ll list those for you later in the posting.

 First, let me define again what these plans are. Nonqualified deferred compensation arrangements, sometimes called “top-hat” plans, are contractual obligations of an employer to an employee or an independent contractor. These arrangements must be ‘unfunded’ for ERISA purposes, but they are often informally financed from unrestricted assets of the plan sponsor (your firm) which are subject to your general creditors in the event of bankruptcy.

 What Are The Misconceptions?

 There are some common misconceptions, however, about these plans. The first of which is that top-hat plans are not subject to the requirements of ERISA. Here is the distinction: Nonqualified deferred compensation plans covering employees are generally subject to Title I of ERISA, while arrangements covering solely independent contractors are not. Let me explain a little bit about the five parts of Title I and NQDC plans. Part 5 only relates to Top-Hat groups. I will not get technical here, but instead have included a link at the bottom to a legal memorandum by the Groom Law Group you can browse when you have more time. It is called the “Group Requirement for ERISA Top Hat Plans.”

Basically, there are five parts contained in Title I of ERISA. For nonqualified deferred compensation plans covering only a top-hat group, there are significant exemptions from ERISA provisions. If a nonqualified plan is maintained by an employer “primarily for the purpose of providing deferred compensation for a select group of management or highly compensated employees”, the plan is not subject to Parts 2, 3 and 4 of Title I. These provisions pertain to plan participation and anti-discrimination rules, and vesting, funding and fiduciary requirements. In addition, by filing a simple notification with the Department of Labor at plan inception, your firm is also not subject to Part 1 of Title I. This provision pertains to plan reporting and disclosure requirements, including the requirement to file an annual Form 5500. This leaves only Part 5 of ERISA pertaining to top-hat groups, this part typically being covered in nonqualified plan documents by including ERISA claims procedures. Here is the Department of Labor Guidance that I mentioned above, and the court cases and best practices follow:

 Department of Labor Guidance

 In 1990, DOL Advisory Opinion 90-14A was issued. In this opinion, the department set out broad requirements for an employee’s inclusion in a top-hat group:

• Management responsibilities or high compensation
• Ability to influence plan design
• Ability to appreciate the risks in a nonqualified plan regarding the lack of ERISA protection and employer bankruptcy risk. Unfortunately, no further guidance has been issued.

 Court Cases and “Best Practices”

 Three general themes emerge for employers needing to determine if their plan participation meets the “top-hat” rules:

1. Select Group: Court cases have generally addressed the size of the participant group in the nonqualified plan vs. the total number of employees in the organization. Although some court cases have allowed top-hat groups to be as large as 15% of the total workforce, a more common rule of thumb is between 5% and 10% of total workforce.
2. Management: The DOL Advisory Opinion and court cases clearly indicate that it is important to address this issue in determining plan participation. Whether an employee is considered “management” can be based on job title, job classification or job responsibilities. Including employees that are clearly not management in a nonqualified plan can cause top-hat issues.
3. Highly Compensated: Unfortunately, the definition of highly compensated for qualified plans does not provide a safe harbor for nonqualified plan top-hat determination. Courts have looked at absolute compensation levels, average compensation of the top-hat group vs. non top-hat employees, and geographic considerations in determining whether an employee is considered to be highly compensated for top-hat purposes.

 As outlined above, the determination of a “top-hat” group for participation in a nonqualified plan can be highly subjective. As an employer, you should always consult with legal counsel or financial advisor to determine top-hat eligibility.  Of course, my team and I would be happy to discuss top-hat eligibility with you as well as provide advice on NQDC plans for your highly compensated employees and your middle managers.  You can call me at 732-974-6400, contact me at tom@rewardexecs.com  or visit us at www.rewardexecs.com

  See you next time!

Tom

 p.s. The Groom Law Group in Washington DC has provided a memo discussing top-hat issues and cases. Please refer to the memo following for more detailed information.

http://www.groom.com/media/publication/58_tophatmemo_2007v2.pdf

 Securities offered through American Portfolios Financial Services, Inc. Member: FINRA, SIPC. Investment Advisory services are offered through American Portfolios Advisors, Inc., an SEC Registered Investment Advisor. American Executive Benefits, Inc. is not an affiliate of APA or APFS.   

 Disclosure: If legal, tax, or other expert assistance is required, the services of a competent professional should be sought. This article is for informational purposes only.

I’ve done several blog posts about the funding of a NQDC plan. As you may know by now, the plan cannot be formally funded without causing your employee to have reportable income immediately – even though the actual benefits are not paid until a future date. That means that the NQDC plans create an unfunded liability on your (the employer’s) balance sheet. There are two ways that you can handle the liability under an NQDC plan.  I will outline those for you, but first I will define the two broad categories of NQDC plans (deferral and continuation):

• In a deferral plan, the employee elects (before the time his/her compensation is actually earned) to receive less current compensation than he/she would have received otherwise. So the employee defers the lesser amount to a future tax year.
• In a salary continuation plan, the employer promises to pay a retirement, disability and/or death benefit without any deferral of compensation from the employee.

 Here is what you need to take into consideration:  An NQDC plan cannot be formally funded without causing your employee to have reportable income right away – this is a challenge since the actual benefits are not paid until a later date. So, your NQDC plans will create an unfunded liability on your balance sheet. Also, your employee faces risks if the unfunded promise to pay benefits is derailed by   profitability slumps at your firm. To equalize this liability and to provide your employee with some assurance that the plan will pay out as promised, many employers choose to informally fund their NQDC plans. You might want to take a look at ways to handle the liability. For example:

1. Purchase taxable investments such as stocks, bonds and mutual fund, or
2. Purchase permanent life insurance on the employee’s life. In either case, the assets or life insurance policy are your properties as the employer and will be subject to the claims of your firm’s creditors.

 Life insurance has at least three advantages over taxable investments as a funding vehicle:

1.  The inside build-up of cash value occurs tax free (unless your firm is subject to the alternative minimum tax. See #3).
2.  The owner of a life insurance policy can make tax-free withdrawals from the policy up to the amount of the owner’s basis and after that the owner can take a tax-free policy loan (subject to contract limitations and charges).
3.  Life insurance death benefits are income tax free to your firm (subject to the AMT). However, regular C corporations (with annual gross receipts of $7.5 million) may be subject to an effective AMT rate of 15% on the inside build-up in a policy and on the death benefit when received.

 When your employee’s retirement, disability or death occurs, your firm can use the death benefit (or cash values) to:

1. Pay retirement or disability benefits through distributions of policy cash values.
2. Pay pre-retirement survivor income benefits to a deceased employee’s beneficiaries.
3. Pay the employee’s beneficiaries the remainder of the retirement or disability benefits should death occur during the retirement or disability income period specified in the plan.
4. Help reimburse your firm for funds paid out for policy premiums and retirement or disability benefits.

 Permanent life insurance is a popular choice for informal funding. The three major tax advantages of life insurance (outlined above) are important factors: the tax-free build-up of cash values, tax-free access to cash values and the tax-free receipt of the death benefit (subject to the AMT). Another advantage is that life insurance provides safety of principal and flexibility in the amount and frequency of premium payments.

 My team and I would be happy to discuss these options with you and help you determine the best way to fund NQDC plans. We can provide advice on NQDC plans for your highly compensated employees as well as for your middle managers and on effective plan financing techniques and cost recovery opportunities.  You can call me at 732-974-6400, contact me at tom@rewardexecs.com  or visit us at www.rewardexecs.com

  See you next time!

Tom

 Securities offered through American Portfolios Financial Services, Inc. Member: FINRA, SIPC. Investment Advisory services are offered through American Portfolios Advisors, Inc., an SEC Registered Investment Advisor. American Executive Benefits, Inc. is not an affiliate of APA or APFS.   

 Disclosure: If legal, tax, or other expert assistance is required, the services of a competent professional should be sought. This article is for informational purposes only.

I read a great article recently by web news editor David McCann in CFO Magazine about the fierce competition for executive talent by US companies. The focus of the story was on employers’ lack of awareness about why their key employees leave the firm. It’s a huge issue for companies and it packs a double whammy when key execs leave because the challenge then becomes how to attract new top talent. Market forces drive the changes, and the competition to recruit new talent is problematic. I hear about these woes quite frequently from my own clients.

 I try to advise them as best as I can. I tell them if they find they are losing key people at their firm, the first thing they must do is pinpoint “why” they are looking elsewhere and what makes them jump ship. Research indicates that one of the reasons is because they are stressed, and many employers seem oblivious to this. Research has also reported conflicting reasons as conducted by the consulting firm Towers Watson saying that human resource professionals at 316 North American organizations said that “opportunities for promotion” as the top reason that high performers leave. But, a separate study of more than 10,000 employees found that “work-related stress” was the chief factor. Employees agreed that advancement opportunities count (that was the second-most-cited motivator on their list), but work-related stress didn’t crack the top five reasons pinpointed by the HR pros.

 Why is this important?  Once again, it points to a lack of awareness, and more top talent losses (or attrition risk) that could result if markets improve.

 Yet companies admit they’ve been pushing employees to work harder and longer. In the survey of HR executives, 65% said employees have been working more hours than normal over the past three years, and 53% said workers will continue to put in expanded hours over the next three years.  This is harder on the employee and his/her family as well. But for employees, the stress may not be due to their longer work hours. In the survey, the employees told a different story. About 57% of senior and middle managers said they were working longer hours, a figure that dropped to 36% (plus or minus 1%) for first-line supervisors and team leaders, administrative and clerical staff, and manual-labor workers.[1]

 Even so, many companies are finding it difficult to attract employees with critical skills (see chart). You can see that the skills gap is getting dangerously close to where it was before the financial crisis. At the same time, the difficulty of filling all employee openings remained at a historically low level for a third straight year.  This send a warning signal to companies to not take their eye off the ball, assuming there is plenty of talent to go around. That may not be the case when you need it.   

 Here, once again, is where employers should evaluate enhancements to their benefit packages — including new or existing nonqualified deferred compensation (NQDC) plans — to provide a competitive edge. Recruit, Retain and Reward!  That’s our mantra…and it works.  My team and I can provide advice on NQDC plans for your employees.  You can call me at 732-974-6400, contact me at tom@rewardexecs.com    or visit us at www.rewardexecs.com

See you next time!

Tom

Securities offered through American Portfolios Financial Services, Inc. Member: FINRA, SIPC. Investment Advisory services are offered through American Portfolios Advisors, Inc., an SEC Registered Investment Advisor. American Executive Benefits, Inc. is not an affiliate of APA or AP Disclosure: If legal, tax, or other expert assistance is required, the services of a competent professional should be sought. This article is for informational purposes only.

Many of my blog posts have focused on Non Qualified Deferred Compensation (NQDC) plans for your highly compensated executives.  I hope you have enjoyed them. I continue to do research on these benefit plans to learn the latest information so I can pass it on to you. What I have discovered is that NQDCs are going mainstream!

 The research I have read was conducted by the Boston Research Group on behalf of the Principal Financial Group in 2011 and I was surprised to learn that the number of middle managers participating in NQDC plans increased from 17 percent in 2008 to 32 percent in 2011.  And the NQDC plan contribution per participant was $19,800, with a median NQDC account balance of $115,000.

 Why should we care about this?  

 Because the median contribution levels and account balances of a typical NQDC participant are much less than those of a Fortune 500 corporate executive. And the growing participation among middle management suggests plan sponsors may be expanding eligibility in the plans to include their future senior leaders as well. The increasing number of mid-level managers participating in these plans indicates that employers now consider NQDC plans to be a mainstream benefit for senior and mid-level key employees. This is a significant development. Employers who do not offer these benefits may lose the ability to attract and retain key management talent as well as good mid-level managers.

 As an employer, you might believe that the mainstreaming of NQDC plans runs counter to the ERISA’s “top-hat” rules. These rules state that a NQDC plan must be “primarily for the purpose of providing deferred compensation for a select group of management or for highly compensated employees.”  A great discussion to have with a financial advisor or legal consultant is how to offer participation in the plan to the full extent allowed by the top-hat rules. If you don’t look more broadly at who may participate in the NQ plan you may find your firm at a competitive disadvantage to your peers in competing for top talent.

 Most of you may already know which of your employees should participate in a NQDC plan. If you don’t, here are three steps you can review:

1. Look at highly compensated employees. A good starting point is the “highly compensated” definition for qualified plans, but an organization often will consider compensation levels above that based on the characteristics of its employee group.
2. Look at the management group in the top 5 percent to 10 percent of earners in the entire employee population. Under ERISA case law, this is a conservative approach to determining the top-hat group.
3. Look at logical management breakpoints, and at organizational goals to be incentivized, as well as at potential plan participants who will want to take advantage of voluntary deferrals.

 The statistic I find incredible is that the average participation rate among non-highly compensated employees is higher by 3 to 5 percent. And the average deferral percentages and account balances are

also higher for both groups when both a nonqualified and a qualified plan exist.

 Something you need to consider, though, is the impact of offering a nonqualified plan on your entire benefit package, and especially on the effectiveness of other retirement benefit programs. A word to the wise, however – there are severe consequences for including non top-hat participants in a nonqualified plan. For example, if the plan is determined to not meet the top-hat exemption, all benefits accrued in the plan could be immediately taxable to the participants. By taking advantage of the ERISA top-hat rules and expanding NQ plan eligibility, employers can provide the opportunity for more of their key employees to achieve their financial goals. You should always talk with legal counsel when determining the eligible top-hat group. 

 My team and I can provide advice on NQDC plans for your highly compensated employees as well as for your middle managers. We can also provide consultative support around effective plan financing techniques and cost recovery opportunities.  You can call me at 732-974-6400, contact me at tom@rewardexecs.com    or visit us at www.rewardexecs.com

   See you next time!

Tom

 Securities offered through American Portfolios Financial Services, Inc. Member: FINRA, SIPC. Investment Advisory services are offered through American Portfolios Advisors, Inc., an SEC Registered Investment Advisor. American Executive Benefits, Inc. is not an affiliate of APA or APFS.   

 Disclosure: If legal, tax, or other expert assistance is required, the services of a competent professional should be sought. This article is for informational purposes only.

 I’d like to talk today about benefit plans for your highly compensated employees (HCEs). But before I do, I’d first like to explain a few things in general that may be misunderstood by some employers. One common misconception is that if they put a 401(k) plan in place, it must be made available to all of their employees to meet the coverage standards and tests imposed on qualified plans. This is not necessarily the case.  And as some of you already know, because of the limits imposed on 401(k) plans, many times a company’s HCEs do not benefit in the same way the other employees do in the same plan. This can pose many challenges for both employer and employee, which we will discuss below. But first, let me define exactly what a highly compensated employee (HCE) is, and what the limits they face are:

HCE definition:   Any employee making in excess of $110,000.  Several of the limits many HCEs face include:

• $17,000 maximum employee deferral ($22,500 if over age 50)
• $245,000 maximum eligible compensation
• 401(k) and 401(m) minimum coverage and nondiscrimination testing

Certain sections under ERISA* provide that if no HCEs are covered under the plan, there is no required testing of minimum coverage or non-discrimination.  Also, the minimum coverage requirements are satisfied “if and only if the plan benefits no highly compensated employees for the plan year.” Once this requirement is met, the employer may exclude certain classes of non-highly compensated employees from participation in the plan. The employer is permitted to include various classifications of employees “if and only if, based on all the facts and circumstances, the classification is reasonable and is established under objective business criteria that identify the category of employees who benefit under the plan.”  If no HCEs are covered under the plan, this gives the employer flexibility in the design of their qualified plan.

*Section 410(b); Section 1-410(b)-2(b) (6); Section 1-410(b)-4.

 What does this mean? To interpret these ERISA provisions, let’s look at a 100-employee company as an example. The company has 5 HCEs, 35 salaried & administrative employees, and 60 hourly, high turn-over employees. The way the company could implement a 401(k) plan for just the salaried and administrative group would be to make the 5 HCEs ineligible by class definition. This would allow the option of also excluding the hourly class from the 401(k) based on a reasonable business classification. Then, the employer could implement a 401(k) plan for only the salaried and administrative employees. The HCE group and the hourly group could be excluded from benefiting under the 401(k) plan.

 So, now after all of this talk about ERISA provisions and plans and what can and can’t be done….what can a firm offer its HCEs to meet their retirement savings needs?  I’ve saved the best until last:  The answer is simple, a Nonqualified Deferred Compensation Plan. This allows the HCE the ability to defer up to 100% of compensation on a pre-tax basis and not be subject to the limits of the qualified plan. A Nonqualified Deferred Compensation plan also gives the employer the ability to selectively benefit its key employees by offering matching or employer contributions at the employer’s discretion.  I have talked about NQDC plans previously in my blog posts, so I invite you to take a look at them if this is something important to you in 2012.

  Our team would be happy to discuss the details of the NQDC plan and the benefits to your firm and to your execs. You can call me at 732-974-6400, contact me at tom@rewardexecs.com    or visit us at www.rewardexecs.com

  See you next time!

Tom

 Securities offered through American Portfolios Financial Services, Inc. Member: FINRA, SIPC. Investment Advisory services are offered through American Portfolios Advisors, Inc., an SEC Registered Investment Advisor. American Executive Benefits, Inc. is not an affiliate of APA or APFS.   

 Disclosure: If legal, tax, or other expert assistance is required, the services of a competent professional should be sought. This article is for informational purposes only.

I’ve talked quite a bit about Non-qualified Deferred Compensation Programs in my blog, and I hope the information I’ve shared has helped you.  As you already know, these plans are a great way for you to help your key executives and employees “bridge the retirement gap” which many people are very concerned about.

 If your key employees are experiencing that gap it is most likely due to the qualified plan limitations. ERISA law mandates that your 401k plan cannot be top heavy, i.e., the majority of the funds going into the plan cannot be from the key employees. When that happens the plan fails testing, and in many cases the contributions must be pulled back out of the plan. A smaller company may consider aSafeHarbor401(k) plan, but medium and larger companies will typically implement a non-qualified deferred compensation plan where they only have to include the key employees. This type of plan is extremely flexible and can be tailored to meet the needs individually of each executive included in the plan.

 So, if your firm is looking for a way to bridge the retirement gap, as well as offer an incentive to retain your key executives, and reward dedicated staff members, non-qualified deferred compensation may be the perfect solution for  your business.

 One of the first things I do before discussing plans with my business owner prospects and clients is to review a checklist that helps me determine if the firm is a good candidate for deferred compensation programs. Let’s go over three of the key items on my checklist that must be in place:

 Bottom Line –

• If your company meets 2 of the following criteria you should consider using a deferral plan
• If your company meets 4-6 of the following criteria most likely you are already using a deferral plan and are reaping the benefits for your company and your top people
• If your company meets 7+ of the following criteria and you are not using a deferral plan then you need to relook your strategies because your top people are going to work somewhere else and your company is losing money and brain trust as a result.

1. Your firm must either be public, private C corp., a pass-through tax entity (like an S Corp, LLC or partnership) that wants to provide benefits for non-owners, or a non-governmental tax-exempt organization.
2. Your business understands the value of retaining its top people
3. Your firm understands that a properly designed performance bonus plan for the top people to share in the success of the company’s performance is vital and shared by all successful firms
4. Your firm places $75M+ in annual sales revenues
5. Your firm has 100+ employees
6. Your top people are restricted in any way from the company 401K plan
7. Your company does not want to give out stock (private or public), but wants top people to share in the growth of the company
8. Your firm should have a strong business continuity plan in place.
9. Your firm must have strong financial integrity with regard to profits, cash flow and financial history.
10. Your company is tired of losing top people to your competition

 There are two additional items that should be in place when considering a non-qualified compensation program. When I talk to my business owner prospects and clients about being a sponsor, I discuss the items above and I also discuss the next two— “Your firm is a candidate for Non-qualified Deferred Compensation Programs if you would like to offer discretionary company contributions to help recruit, retain and reward selected key employees. And remember, you do not have to make contributions, BUT you need to sponsor the plan and most often you will pay the administrative service fees.” Then we discuss the various details that need to be in place to offer a program. If all five items suit the business owner, their firm is a great candidate!

 I hope today’s blog has given you a bit more insight into retaining and rewarding your key executives through non-qualified compensation programs. For additional information email me at tom@rewardexecs.com or call 732-974-6400. www.rewardexecs.com

 Securities offered through American Portfolios Financial Services, Inc. Member: FINRA, SIPC. Investment Advisory services are offered through American Portfolios Advisors, Inc., an SEC Registered Investment Advisor. American Executive Benefits, Inc. is not an affiliate of APA or APFS.   

 Disclaimer: If legal, accounting, or other professional advice is required, please seek the services of a competent expert.