Benefits designed for employees also provide advantages for companies
Key employees help lead a company and keep it on the right path. So finding and keeping those key employees is a priority. Key employees also want to work for a company that values
their hard work – and offers them additional ways to save for the future.
A nonqualified deferred compensation plan is a smart solution for companies and their key employees. It’s designed to help top talent save beyond 401(k) plan limitations for retirement and other savings goals, while helping the organization recruit, retain, and reward them.
Here’s how it works
A deferred comp plan is a type of savings vehicle an organization provides to select key employees. Participants can defer a portion of their annual compensation or bonuses into the plan before taxes. And the organization promises to pay that money to the employees at a future date, plus any earnings or additional contributions the organization may offer.
How a company informally finances its plan can help accomplish these goals – whether the company uses corporate owned life insurance or taxable investments, or company cash flow.
“The plan allows my employer to show employees that they are fully committed to us, and that they want employees to be fully committed to the organization.”
– Mike F., plan participant for 8 years
What you need to know
There are many advantages to this plan, just as there are some things to consider.
For the organization:
Increase morale – Top employees value this benefit, and it helps them remain loyal and motivated.
Leverage incentives – Making optional employer contributions helps retain or reward select key employees.
Receive tax deduction – The money that accumulates to finance the plan remains an asset on the balance sheet until benefits are paid, and the company receives a tax deduction.1
Pay service fees/charge – There are fees for plan administrative services, and there could be a charge to earnings on assets purchased to finance the plan.
For the key employees:
Save more – Take advantage of pre-tax deferrals (up to 100%), tax-deferred growth, and compounded earnings.2
Decide how and when – Decide how much to defer the year prior to earning the income, then enjoy the flexibility to choose how and when benefits are paid.
Design an investment strategy – Tailor the plan with a variety of investment options.
Limited protection – This plan is unfunded and doesn’t provide the same protection as a 401(k) plan.
Potential penalties – If the company doesn’t comply with IRS rules, participants could face taxes and penalties.
Helping key employees save additional dollars for the future with a deferred comp plan is a great way for companies to tie these employees to the organization, while keeping it strong and
2 Contributions to the plan are subject to FICA when benefits vest. Plan participant deferrals may not be deductible in all states.
Distributions are taxable to participants upon receipt.
ABOUT FULCRUM PARTNERS LLC:
Fulcrum Partners LLC (https://fulcrumpartnersllc.com) is one of the nation’s largest executive benefits consultancies. A wholly independent, member-owned firm, Fulcrum Partners is dedicated to helping organizations enhance their Total Rewards Strategy. Founded in 2007, today the company has 13 nationwide offices and more than $6B in assets under management.
Learn more about the Fulcrum Partners executive benefits advisory team at Fulcrum Partners Managing Directors nationwide directory.
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This report is based on information provided by: Principal Life Insurance Company and is shared with their permission. Principal Life is a member of the Principal Financial Group®, Des Moines, IA. Principal.com