Is a Nonqualified Retirement Plan Right for Your Business?
January 14, 2022
Nonqualified retirement plans can promise significant future benefits to covered employees, making them a powerful tool to attract, retain and reward talent. As they are not subject to the Employee Retirement Income Security Act of 1974 (ERISA), nonqualified plans are flexible and can be customized precisely to serve your objectives when it comes to incentivizing and motivating high-ranking employees. Read on to understand whether a nonqualified plan is right for your business and employees.
What is a Nonqualified Plan?
Nonqualified retirement plans are comparable to their qualified-plan counterparts in that they allow an employee to delay income, invest it, and receive the deferred amount plus earnings at a later date (presumably, when the employee is in a lower tax bracket). While nonqualified plans provide a similar opportunity for earnings, they are regulated with very different rules.
Unlike ERISA-regulated plans, nonqualified deferred compensation (NQDC) plans are not subject to the same federal rules regarding:
- Eligible employees – nonqualified plans are commonly offered only to select groups of employees, such as key executives
- Discrimination – employers can skew nonqualified benefits to an employee or category of employees
- Funding – nonqualified plans have no funding requirements
This gives employers more flexibility to design a nonqualified plan that meets their needs.
Types of Nonqualified Plans
Most nonqualified agreements fall under four broad categories:
Salary reduction arrangements
In this arrangement, an employee defers some of their income to a different year. For example, imagine an employee who earns $100,000 per year wants to defer $25,000 to a later year. In the current year, they would receive $75,000, and would only owe taxes on the money they receive.
Bonus deferral plans
This occurs when an employee opts to delay the receipt of their bonus to a different year. In this case, they will not pay the bonus tax rate on their bonus until the future year.
Supplemental executive retirement plans (SERPs)
Also known as top-hat plans, these are nonqualified retirement plans created for the benefit of a particular group of employees, such as management or executives.
Excess benefit plans
Sometimes known as Section 415 nonqualified plans, this type of plan is for employees who meet the contribution limitations of their qualified benefit plans. With an excess benefit plan, employees who have maxed out their qualified plan contributions are allowed to contribute more toward retirement through another plan.
Is a Nonqualified Plan Right for Your Business?
Nonqualified plans may not have ERISA’s protection and tax advantages, but there are still numerous reasons to consider implementing an NQDC plan. Benefits of a nonqualified retirement plan include:
- Employee retention and results may be improved, as benefits are tied to future service and performance
- Highly compensated employees are allowed to save more than the IRS IRC Section 415 limits allow
- Employers can offer significant rewards to select employees as nonqualified plan payments can be of any amount
- Cash is free to be used for current business needs because employers aren’t required to fund the benefit
- Administration costs are minimal – at most, an employer may want to provide employees with periodic benefits statements, but this is not mandatory
- Employers have more freedom in the design of their nonqualified plan
Boulay Can Help
Nonqualified plans meet the needs of your business and employees without the restriction of ERISA’s funding, fairness or eligibility mandates. However, nonqualified plans are subject to IRS IRC Section 409A requirements, which can be complex. To learn more and design a nonqualified plan that best serves your business and your employees, contact a Boulay advisor today at 952.893.9320 or learnmore@boulaygroup.com.
Investment Advisory Services offered through Boulay Financial Advisors, LLC a SEC Registered Investment Advisor. Certain Third Party Money Management offered through Valmark Advisers, Inc. a SEC Registered Investment Advisor. Securities offered through Valmark Securities, Inc. Member FINRA, SIPC
Boulay PLLP and Boulay Financial Advisors, LLC are separate entities from Valmark Securities, Inc. and Valmark Advisers, Inc. Prime Global is not affiliated with Valmark Securities, Inc. and Valmark Advisers, Inc.
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