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Non-Qualified Supplemental Retirement Plans

Employer-sponsored retirement plans for most employees fall under Employee Retirement Income Security Act (ERISA) regulations. ERISA is a federal law that establishes the minimum standards for most voluntarily established private employer-sponsored plans, including funding, vesting, and benefits coverage. However, some employers offer supplemental retirement benefits to certain individuals which go beyond the limits established for qualified plans. These are known as non-qualified supplemental retirement plans.

Non-Qualified Deferred Compensation

Non-qualified supplemental retirement plans are a form of non-qualified deferred compensation. When compensation does not meet the requirements of standard qualified plans, such as a pension or profit-sharing plan, it is treated as a form of non-qualified compensation. Rather than compensating the employee at the present time, it is deferred to a future date, such as the date of retirement.

Non-qualified supplemental retirement plans are generally not available to standard employees. Instead, they are usually provided for executives or high-level corporate employees. These may be tailor-made for an individual employee or negotiated as part of a compensation package. It may also include a compensation plan provided to a small number of high-ranking employees.

Elective deferral plans allow an employee to defer compensation, including salary and bonuses, until a later date. This could include deferral until a future date, a future age, or upon retirement. Deferred compensation may come from the executive's income, such as bonus income, set aside for the future. It may also be funded by the employer funding the executive's future retirement benefits.

Types of Non-Qualified Supplemental Retirement Plans

Supplemental Executive Retirement Plans (SERPs) can act as the sole retirement plan for executive employees, or act as a supplement to a more-typical qualified plan, such as a pension. Qualified retirement plans, including a 401(k), have annual contribution limits. In 2017, the limit for an employee 401(k) contribution is $18,000, with an additional catch-up amount of up to $6,000 for employees over the age of 50. Contributions to SERPs above these limits are not eligible for the same tax deductions as qualified retirement plans.

Non-qualified plans often use cash value life insurance policies. With these insurance policies, the cash value of the policy accumulates based on the amount of premiums paid. Once it reaches a certain level, no more premium payments are required, yet the policy remains in effect. The individual can withdraw money as tax-free loans from the cash value of the policy. The policy and value of death benefit is reduced by the amount of money taken out. A cash value life insurance policy is not subjected to contribution limits. The policy allows the holder the flexibility of tax-preferred cash withdrawals to be used in their retirement.

Executive bonus plans may be used to fund a cash value life insurance policy. The company pays the premiums on behalf of the executive. These premiums may be deductible to the employer as part of the employee's compensation. Any bonus payments may be taxable to the employee.

Other non-qualified plans may include group carve-out plans and split-dollar life insurance plans. In a group carve-out plan, the employer provides a life insurance policy to an individual executive on top of a company's group term life insurance plan. In a split-dollar plan, the company purchases a life insurance policy in the name of the executive, with ownership of the policy divided between the executive and the company. Upon death of the executive, the beneficiaries of the executive receive the majority of the death benefits while the employer is paid back the amount they invested in the policy.

Executive Benefits for Non-Qualified Supplemental Retirement Plans

There are many advantages of non-qualified supplemental retirement plans, both for the executive and for the company. For an executive, deferred compensation through a supplemental retirement plan can ensure they can maintain their lifestyle into retirement, even without their employment income. These plans are also highly flexible and can be tailored to an individual based on their age and retirement goals.

Executives may not be taxed on the value of these supplemental retirement contributions while they are working. This can reduce their current tax liability, and defer liability on their retirement benefits until they time they are paid out. Additionally, if funded through a cash value life insurance policy, the beneficiaries may be able to receive the benefits of their supplemental retirement plan upon the executive's untimely death. These plans allow an executive to maximize their retirement contributions without the standard limitations of a qualified plan.

Company Benefits for Non-Qualified Supplemental Retirement Plans

Companies are also able to benefit from non-qualified supplemental retirement plans. With non-qualified supplemental retirement plans so common among large firms, a company may have to provide these types of plans to attract and retain talented executives. A generous plan bonus structure can also incentivize the executive with additional compensation based on performance.

These deferred benefit plans also help keep an executive with a company when they might otherwise be drawn away with an increased salary. Many of these plans are structured in a way that the executive has to stay with the company for a certain period or they forfeit their deferred compensation. Supplemental retirement benefits also provide significant compensation to an executive without having to compensate them with an interest in the business, such as stock or partnership status.

Supplemental executive retirement plans have minimal reporting requirements and do not have to meet the strict guidelines applicable to qualified retirement plans. This allows a company to tailor their plan to specific executives to meet their goals. In some cases, a company may be able to recover costs of funding a cash value life insurance policy that is used to fund the deferred retirement benefits.

San Diego Non-Qualified Supplemental Retirement Plan Attorneys

Butterfield Schechter LLP is San Diego County's largest firm focusing its law practice primarily on employee benefit legal services. We provide our clients with cutting edge employee benefit plan design. Our attorneys will help establish a non-qualified supplemental retirement plan that meets the needs of your company while providing the maximum benefit to executives and plan participants. We can also assist clients and plan administrators with regular reviews and updates to maintain regulatory compliance. Contact our office today with any questions on how we can help you and your company succeed. 

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