As the landscape of employee benefits evolves, it’s crucial for employers to stay ahead of the curve by offering advanced retirement savings options. Enhancing your company’s 401(k) with a nonqualified plan can help showcase a forward-thinking approach to employee benefits and a dedication to helping your workforce achieve their retirement goals, while helping your organization attract and retain key employees.
Nonqualified retirement savings plans are not subject to ERISA (Employee Retirement Income Security Act of 1974), which regulates qualified retirement plans such as 401(k)s. This exemption allows more flexibility in plan design and contributions, enabling potentially highly beneficial options. These plans are generally offered to high-earning employees or executives, and they can play a part in crafting an attractive recruitment or retention offer.
Considerations for Business Owners
Nonqualified plans can be attractive to employers because they encourage employee retention and alignment with company goals and interests. This can set an employer apart from the competition for employees at the most competitive end of the hiring spectrum. However, their unique complexities require careful communication and administration. Funding and accounting for some plans can present challenges for employers, and there may be legal and regulatory considerations.
Considerations for Employees
Nonqualified plan compensation can come with tax implications and increased risk. These plans do not offer the same tax advantages as qualified plans, and performance-based awards may be subject to market volatility. These benefits are also subject to the company’s financial health, as they are not subject to special protections, and theymay be vulnerable to financial mismanagement and risk of forfeiture if the company goes bankrupt, or if the employee leaves before vesting.
Following are three common plan types, and how they can fit into an employer benefits strategy.
Deferred Compensation Plans: NQDCs
Deferred compensation plans allow employees to delay a portion of their salary and/or bonus on a pre-tax basis to be paid later, typically at retirement. Doing so can reduce their taxable income and defer the tax bill until the funds are withdrawn. These plans are not subject to IRS contribution limits, which make them a valuable tool for highly compensated employees looking for ways to increase their retirement savings.
A Century-Old Firm’s Strategy for Future Success / Case Study
A manufacturing firm recently celebrated 100 years of business, and wanted to identify ways to enhance their company benefits for the next 100 years. In addition to paying their employees a competitive salary, they wanted to offer their top executives a vehicle to save more for retirement. Their retirement plan advisor recommended a nonqualified deferred compensation plan, allowing their executives to defer a percentage of their salary into a tax-advantaged account, and going above the IRS 401(k) deferral limits.
Supplemental Executive Retirement Plans: SERPs
Supplemental executive retirement plans (commonly referred to as “golden handcuffs”) are a type of deferred compensation plans in which the company provides additional retirement benefits to a select group of employees. The benefit may be a predetermined amount or a percentage of the employee’s final salary. SERPs are funded by the employer through a variety of means, such as direct contributions or corporate-owned life insurance. They also allow highly compensated employees to contribute above the IRS contribution limit, and defer their tax liability.
A Health Care Tech Firm’s Innovative Leadership Retention Plan / Case Study
A health care technology firm located in an industry “hub,” with many of their competitors in the same city, wants to stand out when it comes to hiring the best talent. It was especially important for the company to hire and retain a top leadership team to guide them through crucial growth stages. Their 401(k) advisor helped them set up a SERP to reward and retain key executives. The company decided to provide an annual benefit of $50,000 for 10 years to this select group, with immediate vesting upon retirement. This plan allowed the company to incentivize these highly sought-after executives to stay with their firm and provide continuous leadership.
Long-Term Incentive Plans: LTIPs
Long-term incentive plans (LTIPs) reward employees for achieving long-term company goals. These incentives typically take the form of equity, such as stock options or performance shares, or cash-based awards. They are typically paid out after a certain period of time, determined by the company, which can incentivize employees to stay with their company. LTIPs can be an effective part of an employee retention strategy by rewarding loyalty and longevity, and they can be powerful tools for employers and shareholders by helping to drive performance and impact.
Long-Term Incentive Plan Boosts Retention in Solar Panel Business / Case Study
A family-owned business that sells solar panels felt that their mission-critical employees were not the C-Suite, but the salespeople going door-to-door selling their products. They needed a way to reward and retain these top revenue generators. The company created an LTIP that awarded $10,000 every year their sales quota was met, which was payable after a three-year period. The design of this LTIP incentivized salespeople to stay with their company to receive their award, and the company saw an improvement of 20% in employee tenure.
The opinions and analyses expressed in this presentation are based on Curi RMB Capital, LLC’s (“Curi RMB Capital”) research and professional experience are expressed as of the date of this presentation. Certain information expressed represents an assessment at a specific point in time and is not intended to be a forecast or guarantee of future performance, nor is it intended to speak to any future time periods. Curi RMB Capital makes no warranty or representation, express or implied, nor does Curi RMB Capital accept any liability, with respect to the information and data set forth herein, and Curi RMB Capital specifically disclaims any duty to update any of the information and data contained in this presentation. The information and data in this presentation does not constitute legal, tax, accounting, investment or other professional advice.
