Non-Qualified Deferred Compensation Plans

How These Plans Work
  • Only for-profit corporations are allowed to maintain this type of plan
  • The plan must cover only a select group of management or highly compensated employees
  • The assets of the plan must remain assets of the company sponsoring the plan and are not protected from general creditors in the event of bankruptcy
  • The plan allows employees to defer a portion of their compensation not yet earned and shelter it from federal and state income taxation
  • Alternatively, the company can set aside assets for selected employees and promise to pay them at a later time, or upon satisfaction of defined criteria
  • The company would normally credit deferred compensation/company contributions with interests or gains that might be achieved if plan assets had been invested in mutual funds
  • The company can also invest the plan’s assets and credit the earnings to the plan or fund the plan with employer stock; any realized gains on invested assets will be taxed to the company in the year realized
  • The company receives no tax deduction when it makes contributions to the plan but does receive a deduction when distributions are made
  • Distributions are subject to ordinary income tax; rollovers to IRAs or other employer retirement plans are not permitted
Things To Note
  • The plan must comply with IRS “constructive receipt” and “economic benefit rules” and the new rules of Internal Revenue Code Section 409A
  • “Constructive receipt” requires the execution of an agreement to defer compensation before the commencement of the tax year in which the compensation will be earned and gives employees the right to determine when and how their deferred compensation will be paid
  • In the case of a performance-based bonus, the election to defer must be executed at least 6 months before the end of the performance measuring period
  • For company contributions, the employee may be given the choice of the time and/or manner in which the funds are to be paid out; an election governing both must be made in the tax year before the tax year when the company will make the contributions or the plan can specify the manner of payment
  • If the plan only covers a select group, it is exempt from nondiscrimination rules, reporting, disclosure and fiduciary responsibility rules of ERISA
  • Individual plans with different features and design can be established for each employee
  • The company can deposit plan assets into a rabbi trust to provide some protection from a change in management or corporate ownership
What We Can Do
  • Evaluate your objectives and recommend possible plan designs
  • Consult with you on regulatory changes and emerging trends
  • Assist in vendor searches to find service providers for your plan
  • Provide daily valuation or traditional recordkeeping for your plan
  • Prepare the one time notification to the Department of Labor in order to obtain exemption from filing annual Form 5500 and other reporting and disclosures
  • Help you prepare employee communications
  • Prepare plan documents and plan amendments
  • Assist you with any IRS or DOL audit of your plan