Nonqualified Deferred
Compensation Plans
A Tremendous Employer Benefit
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IRS Circular 230 Disclosure: To ensure compliance with requirements imposed by the
IRS, we inform you that, unless otherwise expressly indicated, any federal tax advice
contained in this communication, including attachments, is not intended or written to
be used, and cannot be used, for the purpose of (i) avoiding tax-related penalties under
the Internal Revenue Code or (ii) promoting, marketing or recommending to another
party any tax-related matters addressed herein.
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Skloff Financial Group and National Benefits Group
Over 60 Years of Combined Experience:
– Resolving owners’ and executives’ benefits and retirement needs
– Correcting inefficiencies and shortfalls in current benefits
programs
– Creating management incentives for recruiting and retention of key
employees
– Providing wealth and investment management solutions
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Qualified Plans
– Broad based benefits
– Tax-Advantages
– Strict IRS and ERISA requirements
• Non-Discrimination
• Limits on amounts or levels of benefits
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Nonqualified Plans
– Limited IRS and ERISA requirements
• Not subject to non-discrimination rules
• No limits on amounts or levels of benefits
• 409A
– Address Specific Needs
• Reverse discrimination
• Retention
• Business and estate planning
• Personal savings
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Qualified Plans (e.g. - Pension, 401(k))
– Security
– Broad Based Benefits
– Tax-Advantages
Nonqualified Plans
– Benefits Parity
– Retention
– Performance
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Impact of $16,500 Contribution Limit in 401(k)
Salary Max Pre-Tax Deferral Package
$50,000 33.0%
$100,000 16.5%
$150,000 11.0%
$200,000 8.3%
$250,000 6.6%
$300,000 5.5%
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Impact of $16,500 Contribution Limit in 401(k)
50,000
45,000
Limited in savings as % of
15% of Compensation
40,000
compensation - as little as
35,000
5.5% at $300,000
30,000
25,000
20,000
15,000
10,000
5,000
0
Sample Census, Annual Compensation from $18,000 to $300,000
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Nonqualified 401(k) Excess
– Bypasses qualified plan limitations
– Company can decide eligibility
– Free of most IRS limitations
– Pre-tax contributions
– Tax-deferred growth until distribution or termination
– Pre-59½ distributions without penalty
– Employer Contributions, if any, can have vesting
• Years of Service
• Performance Goals or other criteria
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Phantom Stock
– Specific deferred compensation plan
– Alternative to equity based performance plans
• Doesn’t dilute stock
• Balance cash and equity payouts
• Annual accounting mitigates large expense charges associated with
equity plans
– Offers private companies the ability to offer equity based
compensation plans
• No SEC registration
• Compete against public companies
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Bonused Life Insurance
– Current Compensation
• Corporate Immediate Tax Deduction
– Company Can Set Vesting
– Employee Owned
• No Risk of Forfeiture
• Off of Corporate Books
• Portable
– Advantages Similar to Roth IRA
• Tax Deferred Growth
• Tax Free Benefits
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Advantages of Tax-Favored Retirement Plans
The following example illustrates a 45 year-old who receives $100,000 per year
for twenty years, to retirement age 65, and elects to withdraw retirement benefits
starting at age 65 over a period of 15 years.
Deferred Compensation Bonus Plans Personal Savings
(Pre-Tax and (After-Tax and (After-Tax and
Tax-Deferred) Tax-Free) Taxable)
Annual After-Tax
269,136 269,136 167,364
Income
x15 Years x15 Years x15 Years
Total 15 Year After-
4,037,036 4,037,036 2,510,453
Tax Income
* Assumed annual rate of return of 7.0% gross, 6.52% net of investment management fees.
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Nonqualified Plans at Work
Problem - Retail Company with Contributions Limited
– Low participation in 401(k)
– Many highly compensated were receiving money back from their
401(k) contributions due to limits imposed by 401(k) testing
– Company wanted to resolve the issue of retirement savings limits the
management and officers had faced
• Some employees were limited to annual pre-tax savings of only $2,500
• Company match was limited to $0 for many employees
– Other qualified retirement plan alternatives were not appropriate as they
had to include all employees
• Not cost effective
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Nonqualified Plans at Work
Resolution – Nonqualified 401(k) Excess Plan
– Company set eligibility to include only employees who earn more than
$100,000 per year
– Eligible employees are able to make pre-tax contributions
• Some employees participate up to 100% of compensation, deferring all
income taxes for the year
– Company is able to offer its corporate match in the nonqualified plan
– Plan allows pre-59½ distributions, without penalty
• Tuition and education expenses
• Early retirement
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Aaron Skloff, AIF, CFA, MBA
CEO – Skloff Financial Group
Phone: 908.464.3060
www.skloff.com