Frequently Asked Questions & Answers
A: Non-Qualified Deferred Compensation (NQDC) involves a written agreement between a sponsoring employer and its highly compensated employees (HCEs). It affords HCEs a unique opportunity to voluntarily defer (pre-tax) otherwise currently taxable compensation (salary, bonus, incentives, commissions). Additionally, dollars deferred would grow tax-free until a future specified date - retirement, termination, scheduled distribution, death or disability - whereupon payouts would be subject to the participant’s tax rate at that time. NQDC provides HCEs with a significant additional savings opportunity to effectively plan for their financial future.
A: Few subjects are more important to executives than the sufficiency and security of the assets that will fund their retirement. A variety of factors prevent the accumulation of adequate savings:
- Increasing state income tax rates: 5% to 10%+ (New York, California, etc.)
- High Federal income tax rates
- Qualified retirement plan regulations restrict contributions and distributions:
- 401(k) contribution cap $16,500 (year 2009)
- Pre-age 59½ distribution penalties
- Minimum distribution requirements
- Federal and state income taxes on investment gains from personal investments
A: Today, executives earn more, retire earlier, and live longer than their predecessors. Academic research indicates that the percentage of retirement income required to sustain pre-retirement life-styles increases in tandem with increasing income levels. HCEs recognize the need to build adequate assets and, therefore, most desire to maximize their contribution to their 401(k) Plans. However, IRS regulations limit HCE retirement asset accumulation and planning efforts. Further, personal investment alternatives cannot replicate the economics and tax-efficiencies of employer sponsored benefit plans. To deliver HCEs with an effective solution, an employer can sponsor a NQDC Plan that provides:
- Income tax relief via unlimited pre-tax deferral of salary, bonuses, commissions, etc.
- Tax-deferred earnings on account balances
- A quality menu of diverse investment alternatives
- Enhanced planning flexibility for life-event purposes (college education, etc.), as well as retirement
- Scheduled distributions without an early withdrawal penalty [10% in a 401(k)]
- The following table illustrates the financial benefit of a properly constructed deferral plan:
A: Motivating and rewarding top caliber executive talent through flexible and cost-effective benefits is critically important. Best-in-class NQDC Plans share many attractive features:
- Plan sponsor defines and controls eligibility to participate
- High-value recognition among HCEs (65%+ participation is the norm)
- Can supplement or replace a qualified retirement plan
- Institutionally-priced asset management/investment advisory services
- No discrimination testing
- No contribution limits
- Flexible vesting
- Low plan cost/financial impact:
- P&L “neutrality” through appropriately hedged assets and plan liabilities
A: A significant percentage of large employers have addressed the likely shortfall in retirement income for their HCEs by adopting NQDC solutions. The following statistics reflect the prevalence of NQDC Plans:
- 91% of Fortune 1000 companies offer NQDC Plans
- 92% of financial institutions offer NQDC Plans
- Increasingly, as with other employee benefit trends, mid-size public and private employers are following suit by sponsoring contemporary NQDC for HCEs.
A: Supplemental Disability Insurance is coverage purchased to fill in the gaps that exist with group disability insurance programs. Your ability to earn an income is one of your most valuable assets, and protecting that income and your lifestyle is a critical foundation block for strong financial health.
The reality is most employees are unaware of their current benefits under the company-provided group long term disability (LTD) plan, and what percentage of their total compensation this represents. Many highly compensated employees are surprised to learn that some forms of compensation are not covered under group LTD plans. Most group LTD plans are not designed to cover bonus, commissions, or other forms of incentive compensation and have a cap on the maximum monthly benefit that is far below the financial obligations of many highly compensated employees. In short, this could mean that a high percentage of your current income is at risk.
A: Supplemental Disability coverage is an important building block for a strong financial foundation. With a supplemental plan in place, you can cover a higher amount of your total income beyond the monthly benefit maximums of a group plan.
If your income exceeds the limits under the group insurance plan, you could find your cash flow severely constrained even though the group policy is paying its maximum benefit. The supplemental plan can reduce your risk of substantial income loss by covering a broader range of total compensation at discounted rates with favorable terms and conditions.
Generally, since you pay the premiums, all benefits received are tax-free while under group insurance, the benefits are taxed at the time they are received, if employer funded.
A: Because this is a company-sponsored offering, you are able to buy your Supplemental Individual Income Protection on a simplified issue basis. This means few medical questions and often no exam unless there is a pre-existing condition.
The additional disability plan is also being offered to you at discounted rates which are not available through other sources. You pay through the convenience of payroll deduction ⎯ and since you pay the premiums, the benefits are received tax-free.
What’s more, because this is an individual policy, it’s portable, and goes with you should you leave the company for any reason at the same premium structure.
A: With favorable negotiated terms and conditions, you can provide important financial protection to your employees with discounted rates and offer a voluntary this supplemental product at no cost to the company.
Adding a Supplemental program can stabilize your group plan. We will assist in creating the plan design for cost effectiveness and containment.
Supplemental disability is a recruiting and retention advantage. You can offer the best competitive benefits package which is proven to create employee goodwill & improved moral.
Through our comprehensive service bureau, we offer ease of administration. We work as an extension of your HR department to fully enroll and administer the supplemental plan.
A: Approximately 25% of Fortune 1500 companies currently have a Supplemental plan in place. Generally, we find the plans to be employer paid for key employees but can also be offered on a voluntary basis.