The Advantages of a Non Qualified
Deferred Compensation Plan
Never before in history have people (relative
to capital) been as important to the survival or continuing
success of a business.
For this reason, many employers are more
concerned about the "5R PROBLEM" than ever.
THE PROBLEM: The 5R problem pertains
to what a business needs to do in order to Recruit,
Retain, Retire, Reward, and Reverse the tax law discrimination
against the very individuals who add the most to corporate
profits. These are typically key executives and highly
compensated individuals.
THE SOLUTION: One of the most practical
solutions to the 5R problem is NQDC (Non Qualified Deferred
Compensation). Non-qualified deferred compensation (NQDC)
is a technique for providing meaningful benefits for
senior executives, selected key employees, and others.
(It is ALSO possible to create a NQDC plan for an independent
contractor such as a company's director).
NQDC takes the form of a contract, most
commonly between an employer and an employee, to defer
the receipt of currently-earned compensation in order
to defer the employee's taxation on that income to future
years.
WHY NQDC IS SO POPULAR
First, tax law changes, which have made
alternatives to NQDC (such as a qualified pension or
profit-sharing plan) more expensive, restrictive, and
troublesome have made NQDC relatively more attractive
to employers.
Second, a NQDC plan is highly flexible
and places almost total plan design control in the employer's
hands. The employer has essentially arbitrary power
to pick and choose who will be covered, what benefit
levels will be provided, and under what terms and conditions.
And the employer is free to create different plans for
different individuals.
WHEN SHOULD AN EMPLOYER CONSIDER A
NQDC PLAN?
An employer should consider NQDC when
it wants to:
- Recruit, retain, and retire key personnel.
- · Reward key employees without giving them
a direct equity interest. NQDC can serve as a substitute
for equity-based compensation packages such as company
stock or stock options.
- Compete with a publicly-held company that tried
to lure or attract the same talent pool, but perhaps
could not otherwise because it has no publicly traded
stock.
- Create or help create tax-leveraged financial security
for key employees. Corporate tax deductions can be
used to leverage future benefits the employee will
receive because the corporation will be entitled to
an income tax deduction when it pays out the promised
money (or earlier if for some reason the employee
becomes taxable on the money at some prior date).
In other words money the corporation saves in income
taxes can be used to enhance the money paid out, reduce
the employer's real cost, or achieve both objectives
to some degree.
- Provide supplementary benefits to an individual
who is already receiving the maximum benefits or contributions
allowable to highly-compensated persons under Code
Section 415 and who is blocked from receiving the
same proportion of compensation rank-and-file employees
will be entitled to under the company's qualified
plan. NQDC plans can be designed to make up the difference
and therefore minimize or eliminate the tax law discrimination
against higher paid individuals.
- Provide benefits in lieu of (or as a supplement
to) a qualified pension plan. This may be the case
where the employer wants to avoid the cost and administrative
problems of a qualified plan or wants to avoid the
cost and complexity of covering all the employees
that otherwise would have to be covered with a qualified
plan.
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