Stuart Hindemit ALLrate Advisor
800-818-2946

“10 Reasons Why Smart Business Owners Are Implementing Non-Qualified Deferred Compensation Plans For Key Employees!”

 Under current income tax law, it is very difficult for employers to find benefit plans that allow them to offer benefits only to selected key employees. Non-qualified deferred compensation (NQDC) provides a way for employers to offer special benefits to key people. With NQDC, an employer is able to individually select employees to participate in a plan that will defer taxes and provide additional salary beyond retirement.

 The following are 10 top reasons why a business would implement a NQDC plan. 

1. Selective Participation

Unlike qualified retirement plans that have specific participation and vesting requirements, NQDC plans are not subject to the restrictive requirements imposed by ERISA. The employer can differentiate on an individual basis which of its highly compensated and management employees will receive NQDC.

 2. No Formal IRS Approval

NQDC plans are individually negotiated agreements between the employer and the employee, customized for each employee and do not require IRS approval. 

3. Corporate Cost Recovery

A corporation can use the income-tax free death benefit from a life insurance policy to recover its after-tax benefit payment cost and premium outlay. It is possible the corporation could even have leftover proceeds from the plan to use to find a replacement or some other corporate obligation or initiative. 

4. Tax Deferred Accumulation

The cash value of a life insurance policy accumulates income-tax deferred. Since the life insurance policy is an asset of the corporation, the cash value is available to the company if there is ever a need for additional funds. As long as the policy is not a MEC, the company is able to withdraw cash up to its cost basis in the contract and take policy loans without incurring any income tax liability. This additional source of borrowing may be particularly useful when the company’s line of credit has been used. However, it’s important to note that a NQDC may affect a C-corporation’s Alternative Minimum Tax, especially at the death of the employee. A C-corporation may want to gross up the death benefit amount to pay any AMT related taxes created as a result of the NQDC.

 5. No Contribution Limits

Highly compensated individuals are often limited in their ability to save for retirement through qualified plans. NQDC plans have no contribution or benefit limitations, so executives can fully prepare for retirement through a tax deferred vehicle. 

6. Helps Key Employees Reduce Current Income Taxes

Key employees with high levels of income often find it difficult to reduce current taxes. Using a true deferral type of NQDC plan allows high-income employees to defer salary for retirement. The deferral reduces the employee’s current income, so the overall benefit is usually higher than what the employee could have generated through current receipt of after-tax dollars. 

7. Income Tax Deduction When Benefits Paid To Employee

Unlike qualified retirement plans, where a trustee pays the benefit to the employee, NQDC benefits are paid to the employee by the employer. When those benefits are paid to the employee or the employee’s beneficiary, they are generally income tax deductible to the corporation. The after-tax cost of the retirement benefit can be recovered from the cash value of the policy, while the after-tax cost of the survivor benefits can be recovered through the death proceeds. 

8. “Golden Handcuffs” For Key Employees

Employers find NQDC helpful in attracting and retaining quality employees. The NQDC plan can set one employer’s benefit package apart from others when competitive bidding is taking place. The NQDC also creates a strong incentive to stay with the corporation, helping maintain efficiency and ongoing initiatives without interruption, while preserving continuity of the corporation’s image and culture. 

9. No Age 59½ Restrictions

The early retirement restrictions imposed on qualified plans are not applicable to NQDC arrangements. This gives the corporation greater opportunity to design the plan to reflect the needs of the employer and the employee. 

10. Ultimate Flexibility

In addition to being able to implement without IRS approval and avoid the costs and hassle of most ERISA requirements, the NQDC arrangement allows an employer to take advantage of all the features that are important to the corporation. Provisions like service requirements, age restrictions, encouragement of early retirement and buy-sell integration are among the variety of features an employer can implement in their NQDC arrangements to encourage specific behavior from key employees. 

To request a Free Illustration outlining the plan please call Stuart Hindemit at 800-818-2946.

Note: In order for Employer Owned Life Insurance benefits to retain an income tax free nature, certain requirements under IRC sec. 101(j) must be met. That includes: (1) the filing of IRS Form 8925 by the policyholder; and (2) the completion, signing and inclusion with the life insurance application Form. 

Stuart Hindemit  does not offer legal or tax advice. You should consult a personal tax advisor on any tax matters. In order to comply with certain U.S. Treasury regulations, please be advised of the following: Unless expressly stated otherwise, any discussion of tax information contained in these materials is not intended or written to be used, and cannot be used, by any person for the purpose of avoiding any penalties that may be imposed by the Internal Revenue Service.