Centric’s focus is on executive benefit solutions for senior executives, physicians and other professionals. Our advisors have the ability to effectively administer a variety of plans for both for-profit and nonprofit organizations, while remaining compliant with the latest legislation.
Plans that do not meet the guidelines required to receive favorable tax treatment are known as nonqualified plans. These plans are exempt from the restrictions placed on qualified plans and are typically used to provide additional benefits to key or highly paid employees, such as executives and officers. Nonqualified plans are not "qualified" under the Internal Revenue Code or the Employee Retirement Income Security Act (ERISA), the way 401(k) plans are, for instance, because nonqualified deferred compensation (NQDC) plans are offered only to certain highly compensated employees. Consider the following pros and cons of deferred compensation plans.
- They allow you to defer a significant amount of income to better help you replace your income in retirement. No IRS limits on contributions.
- They give you the ability to postpone income in years where you’re in the top tax bracket for consumption in future years when you expect to be in a lower tax bracket.
- If investment options are available, they provide the ability to select investments to increase earnings.
- There are no nondiscrimination rules on who can participate, so the plan can be used to benefit only owners, executives and highly compensated employees. Other retirement plans may limit contributions or participation due to discrimination rules.
- Your deferred compensation plus any investment earnings are subject to forfeiture based upon the general financial health of the company.
- You have a lack of control of the assets.
- The election to defer compensation and how/when it will be paid out is irrevocable and must be made the prior to the year the compensation would be earned.
- Depending on the terms of your deferred compensation, you may end up forfeiting all or part of your deferred compensation by leaving the company early. That’s why these plans are also used as “golden handcuffs” to keep important employees at the company.
- If available, investment options may be limited or have high expenses.
- If you leave your company or retire early, funds in a Section 409A deferred compensation plan aren’t portable, meaning they can’t be transferred/rolled over into an IRA or new employer plan.
Are you an employee that has access to a deferred compensation plan?
We recommend that you speak with your advisor to determine whether it makes sense in your financial plan to participate in your employer’s Section 409A deferred compensation plan. The following are some questions to consider.
Is the company financially secure? Will it remain financially secure?
Will my tax rate be lower when this deferred compensation is paid in the future?
Can I afford to defer the income this year?
Will my tax rate be lower when the payments are made?
Does the plan have investment options? Are the fees and selection of funds reasonable?
Does the plan allow a flexible distribution schedule?