Non-qualified retirement plans are a tool for companies looking for better ways to help retain key executive-level employees. The advantage to this option over the traditional 401(k) plan is that it can be customized to meet both your needs and those of the employees you want to retain and support.
“Your 401(k) plans are designed to benefit and take care of your rank-and-file employees,” says Timothy Holdsworth, ChFC, a Retirement Planning Specialist at AXA Advisors. “The problem is when you have an executive making a certain dollar amount and they are going to try to replace 70 or 80 percent of that at retirement. The qualified plans just aren’t able to do that.”
A non-qualified plan is a way to be selective in who can participate in the plan. That should not be viewed as an act of disrespect to the employees who must rely on their 401(k) plans, however.
“When you look at a qualified plan, most of them, if done properly, can replace a significant portion of a rank-and-file employee’s salary,” Holdsworth says.
Smart Business spoke with Holdsworth about how non-qualified plans can help you retain key employees.
What are some key advantages to a non-qualified retirement plan?
You can set aside money that grows on a tax-deferred basis and set up certain parameters inside of the plan to vest key employees and highly compensated executives. These plans allow you to put in your own type of vesting schedule. With the non-qualified plan, you set up a supplemental executive retirement plan where the company sets aside money for a select group of employees. The money grows 100 percent tax deferred and when it is paid out, the benefit becomes taxable to the employee. There are a few different ways you can structure a non-qualified plan.
What is a life income plan?
A life income plan allows you to make a substantial gift to a charity of your choice, such as your alma mater, while still providing for your personal or family’s financial needs. You make a contribution, and in return, you receive payments for life or a term of years. When the plan ends, the remaining principle is passed on to your charity to be used as you instruct.
The money goes in after tax. There are really no limitations on how much you can contribute. So if you want to put in $50,000 or $100,000 a year, you can do that. Some popular life income plans are gift annuities, pooled income funds and charitable remainder trusts.
Are there tax benefits to the non-qualified plans?
It depends on the company’s current tax structure and what they are trying to accomplish. Some companies want a tax deduction now. Remember, when you see the word deduction, the company is not putting it in a qualified plan where it is getting a deduction and the recipient or employee who gets the benefit doesn’t pay any tax on it. In a qualified plan, if they pick up the deduction today, the employees are going to pick that up taxable.
So some want deductions now and some choose to worry about getting the deductions later.
Are non-qualified plans better than qualified plans?
No, they are both good plans. Non-qualified plans are designed for situations where the qualified plan isn’t getting the employee enough replacement income at retirement. Or the qualified plans are just too expensive and they really want to put some money aside for people for retirement.
If you’re looking to reward and retain key employees and the qualified plan route has led you to a dead end, you should look at a non-qualified plan. It’s a way that has extreme flexibility for who you want to cover in the plan and how much you want to contribute.
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Please consult with your professional tax and legal advisors regarding your particular circumstances.
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