Executive Deferred Compensation Plans
One of the most important decisions that any successful business owner should makes is with regards to the types of executive deferred compensation plans he or she will put into place for company employees. In essence, a deferred compensation plan is a financial agreement that is usually established between employers and employees. An employee will agree to allow a portion of their salary withheld, or deferred, until a predetermined future date. These types of plans are an extremely valuable tool for accumulating wealth, planning for retirement, and making arrangements to pass your legacy along to the future generations of your family.
Although there are many attractive programs available for businesses to participate in, there are some that are much more beneficial and valuable to a company executive. Deferred compensation planscan fall under one of two categories: qualified or non-qualified. The most common types of deferred compensation programs such as 401(k)s and SIMPLE IRA are under the umbrella of qualified plans. These types of plans are required to adhere to the stringent guidelines and regulations set forth by the IRS which pertain to capped employer contributions, non-discrimination rules, tax filing and reporting laws, and others. The trade-off for complying with the specific IRS rules is attractive tax treatment for all parties involved.
Non-qualified plans are a great way to keep your employees happy while amassing wealth for yourself and enjoying tax benefits, however, as a business owner, you may want to consider executive deferred compensation plans for yourself and your top-level employees. Company officers, executives, and other key players will get the most out of non-qualified plans which allow for more flexibility as they are not as closely regulated by the IRS. Non-qualified executive deferred compensation plans allow employers to be selective about which employees may participate in the program, are allowed to provide the highest benefits for the upper-level employees, and are freed from much of the reporting obligations involved with qualified plans. If this ideology conforms with your business model, you may want to consider one of the following executive deferred compensation plans.
- 3 Common Types of Executive Deferred Compensation Plans
1. Excess Benefit Plans – The IRS sets a capped limit on the dollar amount of benefits that an employer is allowed to provide its employees. Because of this, some businesses elect to adopt non-qualified executive deferred compensation plans like Excess Benefits which allow business owners to go above and beyond the limitations of qualified plans for their company officers, executives, and VIPs. One advantage of these plans is that they are treated separately from 401(k) qualified plans which means if any employer also maintains such a 401(k) program, he or she will not waive the tax benefits that are associated with it.
2. Top Hat Plans – Among the most popular methods for approaching ERISA exemptions are top hat plans. These programs are extremely exclusive, and only selected employees (ie: company executives) may qualify. The main differences between top hat and other retirement plans are that they generally do not provide the same tax benefits, and that not everyone can participate. Even those who have equal company stature may not be eligible under the strict conditions for plan qualification.
3. Supplemental Executive Retirement Plans – Abbreviated to SERP, the Supplemental Executive Retirement Plan is designed specifically for the high ranking company executive. Deferred compensation plans like this allow business owners to identify the employees that they would like to reward, or to attract a potential employee. Basically, the employer offers to provide supplemental retirement income to their employees based upon specific conditions which could involve a commitment to work for the company for (x) years or to meet certain performance levels. An employer may provide funding for SERPs in one of three ways:
- Cash flows
- Investment funds
- Corporate owned life insurance
Of the three, corporate owned life insurance is the most popular choice. This enables employers to purchase, maintain, and own a life insurance policy on the executive’s life. As the owner of the policy, the business will become the policy beneficiary upon the executive’s death, which will allow the business to keep funding SERPs and other employee benefits.
SERPs offer several advantages to both employees and employers. Executives who are included in the plan are obviously attracted to it because the income that they earn won’t be taxed at the higher rates that are applicable throughout their employment. And because the majority of executives will fall into a lower tax bracket upon retiring, receiving deferred compensation benefits are more tax efficient and can make retirement much easier. Employers will enjoy the key benefit of retaining their top level employees. Additionally, the exclusivity of a SERP can save employers money on benefits, and make them easier to set up as they do not require permission from the IRS prior to plan implementation. Please feel free to call (800) 554-7822 to speak with BeamaLife Senior Advisor about deferred comp plans.”