The Executive Nonqualified Defined Benefit Plan
How it Works
This is a nonqualified deferred compensation plan where the employer promises to provide a supplemental retirement benefit for a select group of management or highly compensated employees. The company can choose to informally finance the future obligation or leave the obligation unfinanced.
Employee Advantages
- Plan can restore lost benefits due to IRS limitations and/or provide supplemental benefits to help meet their retirement goals.
- Employees can tailor benefit distribution options to meet their needs.
- There are no excise tax penalties for early distributions or mandatory distributions at age 70-1/2
- Employees are not required to make contributions and do not bear the investment risk of the benefit.
- Employees have Internet access to benefit information and "what if" calculations.
Company Advantages
- Company contributions lost due to IRS restrictions in qualified plans can be restored.
- The company can design discretionary and discriminatory incentive benefits to recruit, retain and reward valuable key employees.
- Assets accumulated to informally finance the plan remain an asset on the company’s balance sheet.
- The plan requires no nondiscrimination testing, minimum participation or Form 5500 filing, if set up properly.
Employee Considerations
- No loan provisions
- No rollover provision into an IRA
- Limited ERISA protection
- Contractual obligation versus fiduciary liability
- Rabbi Trust can help manage this risk
- Assets financing the plan are owned by the company and are subject to company creditors
Company Considerations
- The company takes investment risk by making a promise to pay a defined benefit
- Deferred income tax deduction versus a current income tax deduction
- Accrue future deduction as a Deferred Tax Asset to reflect timing difference
- Potential charge to earnings on the taxable investments or COLI assets purchased to finance the plan
- Administrative service fees
- Human resource time to communicate the plan benefits to eligible participants
Approval #384552006
