Many business owners and executives would like to save more money for their retirement freedom plan than they’re currently allowed to sock away in their 401(k). For 2017, the annual elective deferral contribution limit for a 401(k) is just $18,000, or $24,000 if you’re 50 years of age or older.
This represents a significantly lower percentage of the typical owner-employee’s or executive’s salary than the percentage of the average employee’s salary. Therefore, it can be difficult for these highly compensated employees to save enough money to maintain their current lifestyle in retirement. That’s where a non-qualified deferred compensation (NQDC) plan comes in.
NQDC plans enable owner-employees, executives and other highly paid key employees to significantly boost their retirement savings without running afoul of the nondiscrimination rules under the Employee Retirement Income Security Act of 1974 (ERISA). These rules apply to qualified plans, such as 401(k)s, and prevent highly compensated employees from benefiting disproportionately in comparison to rank-and-file employees.
NQDC plans are essentially agreements that the business will pay out at some future time. This includes benefits at retirement, and compensation that participants earn now. Not only do such plans not have to comply with ERISA nondiscrimination rules, but they aren’t subject to the IRS contribution limits and distribution rules that apply to qualified retirement plans. So businesses can tailor benefit amounts, payment terms and conditions to the participants’ specific needs.
There are several types of NQDC plans. Among the most common are:
The key to an NQDC retirement freedom plan: Since participants did not receive a transfer of the promising compensation, it’s not yet actual income of earning — which means no current taxing. This allows the compensation to grow tax-deferred.
Naturally, there are challenges to consider. NQDC plans are subject to strict rules under Internal Revenue Code Sections 409A and 451. They also generally do not allow plan loans. But attracting and retaining top executive talent is a business imperative, and an NQDC retirement freedom plan can help you win the talent race with a powerful benefits package. Please contact our firm for further details.