Traditional 401(k) retirement plans don’t do enough to attract and retain highly compensated employees, and companies are pivoting to nonstandard compensation programs to address that need. Nonqualified, or NQ, plans are a growing part of the human resources (HR) tool kit for recruiting and retaining critical leaders. Companies are offering senior executives NQ plans to bridge the gap between their 401(k) maximum and their retirement savings goals. Providing an NQ plan is proven to give an organization a competitive advantage in recruiting and retaining top employees.
NQ plans come in many shapes and sizes. As these plans gain in prominence, here are three key factors for successfully adopting them:
1) Tailor your plan. For NQ plans, like most investments, no one size fits all. One of the many benefits of NQ plans is that they are flexible and can meet a range of employer objectives.
Whether developing your plan for an individual or a distinct group of senior staff, explore the different options available for increasing the employee benefit. The use of asset strategies and structures, for example, can help significantly with meeting long-term objectives and future liabilities. Such asset strategies commonly include corporate-owned life insurance (COLI) or mutual funds, while unique asset structures such as company stock, exchange-traded funds (ETFs) or limited liability partnerships (LLPs) are also utilized to meet varying funding needs.
NQ plans can also be structured through a grantor trust. Grantor trusts help protect employees from a change of control or a change of heart by management regarding the intended use of the assets, while facilitating the administrative and tax reporting requirements associated with the plan.
2) Steer clear of conflicts. When contemplating the various benefits that can be incorporated into NQ plans, it’s also critical to recognize the potential conflicts that may arise when choosing service providers. NQ plans touch different players in the ecosystem including plan advisers, recordkeepers, custodians/trustees and investment managers, with each having its own distinct role in servicing a plan. These roles sometimes compete for the same business, requiring employers to perform a high level of due diligence on service providers. The best solution most often is hiring providers that have the depth of experience and expertise in their respective field to provide a comprehensive, conflict-free approach that includes independent advice and open architecture platforms.
3) Maximize tax incentives. Tax rules for NQ plans vary by state, and it’s critical to look at the jurisdictional differences when selecting a trustee or custodian for your plan. For instance, some states, such as Colorado, may offer insurance premium tax discounts for trusts holding COLI when the trustee maintains situs in Colorado and the insurance carrier is domiciled there as well. This could provide companies with tax savings while potentially increasing the overall benefit to the employee and organization. How to maximize tax incentives while minimizing tax implications is an important consideration when offering an NQ plan for top employees. Make sure your service provider looks into jurisdictional tax implications and designs the plan to maximize any tax benefits.
NQ plans are competitive structures that can be designed with flexibility to meet the demands of senior executives for additional retirement savings options. As competition for high-caliber talent increases and retirement shortfalls grow, it’s vital that companies consider offering NQ plans as an incentive for their top talent. Having service providers that are conflict-free, offer depth of expertise and experience in their respective area, and are committed to the NQ plan marketplace is the essential combination to achieving a successful incentive program for organizations and their most important employees.
NOTE: This feature is to provide general information only, does not constitute legal advice, and cannot be used or substituted for legal or tax advice. Statements by the authors do not necessarily reflect the stance of Strategic Insight or its affiliates.