Last year, Newport Retirement Services and PLANSPONSOR published an insightful executive benefits report based on a survey of 282 public and private for-profit companies, representing a cross section of industries. Among the topics the survey addressed was that of “class year” or “account based” plan design for the companies’ nonqualified deferred compensation plan (NQDC), of which, 98 percent of the companies participating in the survey currently offer.
We appreciate the opportunity to share a portion of their findings with you.
Distributions: Does the NQDC Plan Use a “Class Year” Structure or an “Account-Based” Structure?
Survey Findings show that account-based structures (42%) and class-year structures (52%) continue to be popular. Account-based plans focus on participant-selected specified distribution dates (including in-service distributions, retirement, death, termination, etc.). Class-year designs have distribution elections for each annual enrollment and sometimes for each source of compensation deferred.
Account-based plans are generally viewed as simpler for participants to understand and manage. Account-based structures also fit well within the framework of IRC §409A, which focuses on proper administration of distributions. Class-year structures offer flexibility due to the greater number of sub-accounts created. However, this also produces more complexity for distribution management.
Over time, these two approaches have tended to split 50-50 with no one plan design becoming dominant. The class-year approach is broadly available through adapted 401(k) systems. The account-based design is a more refined and participant-friendly approach geared towards the management and timing of distributions. We (Newport) anticipate that the current focus by employers to increase plan understanding will encourage more companies to use an account-based approach to assist their key people in distribution planning.
Source: Newport/PLANSPONSOR Executive benefits Survey, 2020 Edition
For in depth look at Multiple Bucket Plans and Class Year Plans, read Impact of the SECURE Act 2019 on NQDC Plans and Retirement Distribution Elections
This material has been prepared for informational purposes only, and is not intended to provide, and should not be relied on for, accounting, legal or tax advice. Any tax advice contained herein is of a general nature. You should seek specific advice from your tax professional before pursuing any idea contemplated herein.
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