Many companies offer retirement benefit plans to their employees. However, standardized retirement benefit plans may not have the same appeal to executives as they would to regular employees. Executives are increasingly offered targeted retirement benefits that benefit both the company and the executive.
There are a number of benefits to offering high-level employees an executive benefit plan. Executive benefit plans allow executives to put more money into their retirement account and take tax advantage of deferring compensation. At the same time, employers are able to attract top talent without offering the largest salary and may be able to gain other tax benefits.
Deferred compensation may allow executives to defer their tax liability by receiving their pay at a later date, presumably when they are in a lower tax bracket. There are a number of options for deferred compensation with tax advantages. This includes qualified and nonqualified deferred compensation plans.
Qualified deferred compensation plans are those that fall under ERISA. This includes retirement benefit accounts like 401(k)s or 403(b)s. However, companies are limited in what they can do with a qualified deferred compensation plan and cannot use these plans to offer highly compensated employees additional benefits. Instead, most executive benefit plans focus on nonqualified deferred compensation options.
The benefits of a nonqualified deferred compensation plan may not pay out until a certain future date, such as retirement, a specific age, or when the employee leaves the company. This is a way to incentivize executives to stay with the company and not jump ship when another company offers a higher salary. These types of compensation plans may be referred to as “golden handcuffs.”
Nonqualified deferred compensation is generally limited to executives. Employers are more flexible with these types of executive benefit plans that can offer specific benefits for each employee. Executive benefit plan options may include Supplemental Executive Retirement Plans (SERPs), tax-favored life insurance plans, or nonqualified stock option plans.
SERPs allow the company to set aside a percentage of the executive's pay to be paid out at the time of retirement. The specifics of the SERP are provided in a formal agreement, based on eligibility requirements and vesting schedules. At the time of retirement, the executive will be taxed on the payments as ordinary income. The company can also deduct the benefit payments as expenses. However, one drawback of SERPs for executives is that the plans are not portable, like a 401(k).
Another option is a “top hat” 457(b) plan. A top hat 457 plan is a nonqualified deferred compensation retirement plan available to a limited group of higher compensation employees, including directors and officers. However, these plans must remain unfunded with assets remaining the property of the employer. This leaves employees with a lower claim than general creditors in the event of bankruptcy or other legal claims against the employer.
If you have any questions about executive employee retirement plans, Butterfield Schechter LLP is here to help. We are San Diego County largest law firm focusing its law practice on employee benefits law. Contact our office today with any questions on how we can help you and your business succeed.