The question was recently posed to the team at Fulcrum Partners, “What are the most frequently asked questions (FAQs) about NQDC plans that your executive benefits consultants hear? After a little discussion, we agreed on the following five questions as the top FAQs we encounter regarding nonqualified deferred compensation plans.
Question 1: What type of existing retirement plan issues within an organization might indicate that a company would benefit by offering an NQDC plan to its executives?
Answer: Companies that process 401(k) refunds each year, or have 401(k) discrimination testing limitations, will need a NQDC plan to satisfy the deferral expectations of their highly compensated executives (HCEs).
Question 2: How does a plan sponsor’s expense for NQDC plans compare to other traditional retirement benefits?
Answer: NQDCs are very low-cost plans and administrative fees are nominal. The only material cost of offering an NQDC plan is the company match if the company chooses to offer one.
Question 3: Do NQDC plans need to provide both a voluntary deferral opportunity and company contributions?
Answer: NQDC plans offer significant flexibility in design. The plans can be designed for 100% voluntary deferrals, 100% company contributions, or a combination of both.
Question 4: Are there any downsides to NQDC plans?
Answer: The benefit security of an NQDC plan is less than that of a qualified 401(k) plan. If executives are concerned about the financial future of their company, an NQDC plan might not be a good solution. Otherwise, NQDC plans can be a very powerful retirement tool for highly compensated executives.
Question 5: Why are NQDC plans so beneficial for HCEs?
Answer: Although there are numerous benefits for both HCEs and the employer (as the plan sponsor) afforded through the use of a nonqualified deferred compensation plan, the key benefit is simply this: NQDC plans provide a flexible retirement savings strategy that positions HCEs to accumulate tax deferred savings beyond the limits placed on qualified plans such as 401(k), IRAs, or 403(b) plans.
Contact Fulcrum Partners
If your organization does not offer nonqualified deferred compensation plans to its executives or if you would like your current offerings evaluated to ensure that they align with company objectives, contact any member of the team at Fulcrum Partners.
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