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Nonqualified deferred compensation plans: Balancing employer & employee goals

Using benefits to attract and retain key employees

The race for talent – particularly management and leaders of critical functions – is a constant issue facing employers. This important lever is used by businesses to innovate and generate growth. The question is whether your organization has an employee benefit that targets this group of key employees, helps further organization’s goals – and at the same time helps top talent address their own financial goals.

Businesses can sponsor a plan for key employees to defer compensation – to supplement retirement planning or other savings needs – on a tax deferred basis. A nonqualified deferred compensation plan (NQDC) can allow key employees to defer a portion of salary and/or bonus income, based upon plan design.

Employer-sponsored qualified plans are a popular choice to defer current income for retirement. There are, however, testing and contribution limits. Particularly with smaller firms, higher wage earners may be constrained as to how much they are allowed to put into a 401(k) or other qualified plans.

Sponsoring a voluntary NQDC plan offers select employees an opportunity to defer compensation in excess of qualified retirement plan limits on a pre-tax basis. They can work with their personal financial professionals to determine the appropriate amount of income they want to defer, and when they want to take distributions based on savings needs or other tax planning issues. The elections to defer compensation must be made in advance of earning the income and there are regulations on applicable distribution events. NQDC plans also have limited ERISA protection so the employer has a contractual obligation versus a fiduciary obligation.

Imagine a benefit that allows top employees to decide how much and what type of income to defer, and also determine when and how that income will be paid out. This allows them the opportunity to increase their chances of a successful retirement, or help save for larger financial goals (like helping with children’s college education or a second home) while working. All while allowing them the opportunity to reduce their current taxable income and providing flexibility for managing income while working and in retirement.

It’s time to go beyond imagining – consider a NQDC plan that lets you round out a competitive benefits package and helps you attract and retain key employees. And, the opportunity to offer this plan on largely cost neutral basis for your organization.

This information is not intended as authoritative guidance or tax or legal advice. You should consult your attorney or tax advisor for guidance on your specific situation.

Securities offered through LPL Financial, Member FINRA/SIPC.

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