Nonqualified Plans: Understanding the Fundamentals

Since the passage of The Employee Retirement Income Security Act of 1974 (ERISA), companies have found it difficult to provide their top executives with a retirement accumulation program that matches the level of benefits the average employee will receive.

The Gap is Real

This information is from the Principal Financial Group® Replacement Ratio Calculator with source information from the Annual Statistical Supplements to the Social Security Bulletin (www.ssa.gov). It is intended to demonstrate the potential impact of Social Security and 401(k) plan benefits at various income levels. For more information on your individual circumstances, please speak with your financial or tax professional.

Nonqualified deferred compensation plans can serve an important function in helping to fill the significant gap between the combined amount of a worker’s social security retirement benefits plus his/her qualified retirement benefits and the amount of retirement savings he or she will need in order to replace current income.

Regulatory Limits on Qualified Plans Drive the Need for Nonqualified Plans
• 401(k) limits executive contributions to $19,000 (2019)
• The maximum compensation eligible for qualified 401(k) or pension plan benefits is $280,000 (2019)

As a result, many employers have established nonqualified plans to supplement their broad-based plans and, therefore, provide competitive retirement accumulation for executives.

Nonqualified Plans Function as an Employer/Employee Agreement
• A nonqualified plan is, fundamentally, a contractual agreement (plan document) between an employer and one or more key personnel
• The company makes an unsecured promise to pay benefits subject to all the terms of the “agreement”
• A participating employee can never be more than a general, unsecured creditor of the employer as to the benefits (if current taxation of that benefit is to be avoided)

The Need for Executive Benefits
Employees deserve retirement security—to be allowed to perform their jobs creatively and enthusiastically, without the burden of retirement security hanging over their heads.
Employers need to be able to attract and retain quality management talent; to create management incentives; and to restore retirement income shortfalls for key executives, balancing risk with reward for directors.

This article is shared with permission from Fulcrum Partners. Click here for more information.

Leave a Reply

Your email address will not be published. Required fields are marked *