Should Your Company Offer Non-Qualified Retirement Plans?
Absolutely. Non-qualified company retirement plans are perfect for bridging the gap between major promotions and top-level positions, as well as compensating hardworking high-level executives and valued employees.
As salaries and employee value rise according to pay grade, the tax burden on the employee and employer also grows. Plus, ambitious employees will always be searching for ways to move upward within their companies. Employers, inevitably, will need a way to compensate valuable employees for their work when a promotion is unavailable.
Offering a non-qualified retirement plan is a way to reward employees who have served their companies well. They provide exemption from discriminatory and high-income testing to which qualified plans are ordinarily subject.
What Is a Non-Qualified Retirement Plan?
Non-qualified retirement plans are retirement savings plans that are tax-deferred (i.e. tax is paid later), funded by an employer, and do not qualify under the Employee Retirement Income Security Act (ERISA). They enjoy many exemptions from tax burden and allow recipients to defer tax payment so that they can begin paying after moving to a lower tax bracket post-retirement.
Types of Non-Qualified Retirement Plans
Employers can choose to offer one or more of four major types of non-qualified plans:
1. Deferred Compensation Plan – These plans are funded by an employee’s bonus income and provide supplemental retirement income. Salary continuation plans, a subset of deferred compensation, are funded entirely by the employer.
2. Executive Bonus Plan – Under these plans, executives receive a life insurance policy. The premium is covered by the employer as compensation, which allows employers to deduct the premium amount.
3. Group Carve-Out Plan – Through a group carve-out plan, employees choose an amount of group life insurance over $50,000 and replace it with an individual policy, which cancels the tax responsibility paid when group life insurance exceeds $50,000.
4. Split-Dollar Life Insurance Plan – Split-dollar life insurance plans provide employees with permanent life insurance owned by both the employee and employer. The employer pays the premium and the employee pays the mortality cost. Upon death, the employee’s beneficiaries receive the death benefit, and employers takes a portion equal to their investment in the plan.
As a small business owner, choosing a type of plan to offer employees hinges heavily on how much of the burden of compensation you are willing to take. Taxes may also factor into your decision.
Why Should I Offer Non-Qualified Retirement Plans?
You should offer non-qualified retirement plans to employees because they benefit both you and the employee, whether you run a small, medium, or large company.
Benefits for employers include:
· Tax-deferred compensation options for valued employees near retirement
· Additional compensation options for employees seeking promotion where none is available
· Compensation for employees that reduces taxes for the employer and employee
Benefits for employees include:
· Increased retirement income
· Option to pay taxes on retirement income after entering a lower tax bracket
· Superior life insurance policies that pay death benefits with lower taxes
Of course, because non-qualified retirement plans can become expensive, benefits should be reserved for employees who are key to company success and are seeking additional compensation where it is not currently available.
Interested in learning more about non-qualified retirement plans and managed funds? Schedule a meeting with Americans for Life today.