As more and more C-level executives retire and the market for more upper-management talent shrinks, employers are increasingly having to offer more aggressive benefits and compensation packages to attract and retain them.
While you may provide 401(k) benefits to your rank and file, for many executives the yearly investment limit is far too restrictive to fulfill their needs. So, what are your options for top executives who want to sock away more money for the future than other employees can?
The answer for many firms is a non-qualified deferred compensation plan or a supplemental executive retirement plan. These plans can help solve retention and motivation problems, helping to retain executives who are much needed for the continuity of your corporation’s success.
Non-qualified deferred compensation plans
One solution to the limits of traditional qualified plans is deferred compensation. Non-qualified deferred compensation plans can be designed to look like the standard features of a 401(k) plan, except that they do not have a cap on the amount the executive can put away in the plan.
In this type of plan, you can defer various forms of pay, including base, bonus, commissions and special incentives. More flexible payout schedules can be arranged as well.
A non-qualified deferred compensation plan does not have to be solely retirement-focused, and you can set a plan up that defers payouts to a future date before retirement. This type of plan may, for example, be attractive to a younger executive who wants to save up for her children’s college tuition.
Non-qualified deferred compensation programs can be constructed to make it easier for your executives to handle other important expenses, such as a retirement home or other anticipated future expenses.
For example, your non-qualified plan could allow an executive to elect distribution of four annual payments beginning in a future year to finance tuition and expenses for a child entering college that year.
Non-qualified deferred compensation plans help close the “retirement gap” by allowing executives to put away the amount they will need for a retirement suitable with their current lifestyle.
Business owners can also pick and choose who participates in the plan. In fact, better still, they can customize a specific plan for each executive.
Non-qualified plans also provide tax advantages, both for employees and businesses. Often, plans can be designed with minimal or no impact to the company balance sheet and over time can actually improve it.
SERP’s up!
A selective executive retirement plan (SERP) targets key personnel and allows the company to pay out a percentage of an employee’s pay at the time of retirement over a number of years, like an annuity or pension.
SERPs are partially funded by the company, like a 401(k)-matching benefit or a defined-benefit plan, but you should know that SERPs are not portable like 401(k) plans are.
SERPs must be limited to a top group of executives and/or directors, due to the penalties that could arise through ERISA-based claims if a plan covers more than a top group.
These types of plans are commonly called “non-qualified” because they cannot meet the broad coverage rules that are necessary to secure the special tax treatment afforded to tax-qualified retirement plans.
Although not without tax risk, a SERP may permit executives to self-direct the measures for the return on their account balances. The employer usually selects the range of available choices in order to facilitate plan administration.
