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Benefits Focus

How nonqualified plans fit with your benefits strategy

With today’s growing economy and increasing competition for top talent, nonqualified deferred compensation (NQDC) plans can be one of the most valuable assets in a company’s benefits package. The unique features of these plans help participants manage their tax liability, close the retirement savings gaps caused by contribution limits on 401(k)s and other qualified retirement plans, and save for financial goals other than retirement. These advantages in turn can help companies attract, retain and reward a select group of key managers or other highly compensated employees.

The key to maximizing the benefits of an NQDC plan lies in making it a component of an integrated, comprehensive compensation and benefits package that complements other benefits programs—including 401(k)s, defined benefit plans, company stock awards and health benefits.

NQDC plans provide important support for financial wellness for certain employees, particularly highly compensated executives. The plans, offered as part of an integrated suite of benefits, provide unique flexibility to save for both short- and long-term goals while managing taxes and other considerations. The value NQDC plans bring makes them valuable for employers looking to attract and retain key employees.

Many companies looking to recruit top talent incorporate deferred compensation plans to make their benefits packages more attractive. Others use deferred compensation to retain key managers or to provide incentives for meeting performance goals. Deferred compensation works well in a wide range of circumstances in part because NQDC plans, unlike qualified retirement programs, are not subject to most ERISA requirements. That means employers have considerable leeway and discretion in deciding:

Which select groups of management or highly compensated employees (HCEs) are allowed to participate.
What types of compensation participants can defer, including salary, bonuses, commissions and restricted stock units.
When and how participants can take distributions, such as only upon retirement or while still employed, or as a lump sum or annual installments.


Benefits of an NQDC plan include:

1 Help key employees close the retirement gap
Annual contribution limits on 401(k)s and other qualified plans mean that highly paid workers can’t contribute enough in those accounts to reach the recommended 80%–90% income-replacement level for retirement. Deferred compensation allows participants the ability to defer the payment of additional earnings, creating larger amounts available at retirement to close that gap.
2 Recruit top talent
Including an NQDC plan in your benefits and compensation package can help you attract strong candidates for key management positions. The ability to defer compensation for goals other than retirement is one of the most attractive features of this benefit, so designing a plan that allows “in-service” distributions can make your offer more competitive.
3 Retain key management
Employers can use their NQDC plans as retention tools by adding a vesting schedule for some employer contributions and paying the employer contributions when employees leave the company. For example, you can make a deferred compensation contribution as part of a signing bonus for a new key manager but require him or her to stay with the company for five years before vesting.
4 Equalize benefits among select members of management
You can target a plan specifically to highly compensated employees or key members of management who are otherwise shut out from other benefits or compensation programs. This strategic use of deferred compensation can make your overall benefits strategy equitable without having to offer the same programs to all managers.

The flexibility of NQDC plans means that employers and participants have tremendous freedom to decide the best approach for their unique needs. There’s no one-size-fits-all plan that every company should adopt. The appropriate plan for your business requires up-front analysis of the NQDC plan in the context of an overall compensation and benefits strategy. Likewise, participants must think carefully about deferral elections and distributions based on their overall financial pictures and future goals.

An NQDC plan is unfunded and unsecured. The balance in a participant’s account represents a promise to pay non-qualified benefits at a future date. Any investment choices are “deemed” as investments for the purposes of calculating the participant’s account value in the NQDC plan. However, they are not actually invested in the underlying investment vehicles. The plan is backed by the general assets of the company and any funds that may be set aside to pay benefits are subject to claims by the company’s creditors. Participants have no rights to any assets other than as a general unsecured creditor.

Working with a qualified, experienced provider that understands how to design and service NQDC plans can help you identify an appropriate strategy. And when done properly, this up-front work can pay off for years to come. When you see participants fully utilizing the deferred compensation plan as part of their overall financial wellness strategies, you’ll know you’ve designed the right plan to help them and your company work towards a more secure future.

Takeaways

Talk with your Bank of America Merrill Lynch representative about how an NQDC plan can benefit your company and goals.

Use this brief questionnaire to help guide a conversation with a Bank of America Merrill Lynch representative about implementing an NQDC benefit at your company.