Non-qualified Deferred Compensation Plan
Non-qualified deferred compensation (NQDC) plans are designed to circumvent the limitations imposed by ERISA (Employee Retirement Income Security Act) for key employees. Key employees are defined as a small percentage of the employee population who are key managers or who earn substantially more than other employees. The courts and the Department of Labor (DOL) consider a number of factors in defining key employees:
• number of employees versus number of employees in the NQDC plan
• average salaries of select group versus average salaries of other employees
• average salary of select group compared to average salary of managers or highly compensated employees
• the salary range of employees in the select group
Additionally, the DOL also considers any employee with enough importance to negotiate their compensation plan to be part of the select group.
Supplemental Executive Retirement Plans
A supplemental executive retirement plan (SERP) is a top-hat plan often structured as guaranteeing a certain payment in retirement, much like a defined benefit (DB) plan. Under some SERPs, the employer may pay the difference between Social Security benefits received by the employee and distributions from the employee's qualified plans with the employer, so that the employee receives a certain income. Formulas for calculating benefits vary: the participants can be paid a flat dollar amount for a certain number of years after retirement; a percentage of their salary at retirement may be multiplied by the number of years with the company; or as a fixed percentage of their salary at retirement for a specified number of years. SERPs can be funded through general assets, sinking funds, or corporate owned life insurance.
Executive Bonus Plan
An executive bonus plan (aka executive bonus life insurance plan) is a plan an employer for key employees. Consequently, the employer can deduct the payment from taxable income while the employee will receive taxable income. The employer can pay the premium either directly to the insurance company or to the employee, who would then be responsible for paying the premium to the insurance company. The employer may even pay an additional amount to cover the taxes on the premium payments. However, the employees own the policy and can name their own beneficiaries. Earnings are tax-deferred and contributions are flexible. Additionally, the employee can receive some tax-free income through partial withdrawals and loans on the policy. The main benefits to the employer is that the executive bonus plan is easy to implement and maintain and premiums are tax-deductible. Since an executive bonus plan is based on a variable life insurance policy, the employer is not obligated to continually pay premiums, but the cash value of the policy will be less without premium payments.
Deferred Savings Plan
Deferred savings plans are credited by salary reductions from the employee's pay. The plan may allow the employee to defer up to 25% of salary and up to 100% of bonuses to the plan. Taxes are assessed on the amount by the later of when the services are performed or when there is no longer a substantial risk of forfeiture. The employer may guarantee either a fixed rate of return or the return earned by a selected mutual fund or index. Additionally, the employer may offer matching contributions, profit-sharing, or incentive-based contributions. Because deferred savings plans are bookkeeping entries, the deferred contributions are not actually placed in an account that earns an actual return. Instead, the employer simply promises a specific rate of return. However, this rate of return must be reasonable; otherwise, a tax penalty will be imposed on the excess. The employer is free to determine how to fund the future obligation. The employer may choose to pay the obligation out of operational funds when it becomes due or the employer may invest the money or buy insurance products to finance the obligations. If the actual returns from the investments or insurance products is greater than the obligation, then the employer will keep the difference. However, if there is a shortfall, the employer will still be obligated to pay the return promised.
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Avina Financial Group, Inc.
Ca Insurance license #0G06112
13006 Philadelphia St., Suite 305
Whittier, C A 90601
Investment advisory products and services are made available through Avina Financial Group, Inc., a registered investment adviser with securities offered through T.D. Ameritrade Institutional.
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