Who Uses Non-Qualified Plans for Retirement?

         One of our Value Propositions in educating clients about retirement and wealth accumulation is to follow the model of executives in Corporate. We encourage clients to learn more about each type of retirement plans created by Congress:

• Qualified Plans such as 401k, 403(b) and similar plans, and

• Non-Qualified Plans, such as NQDC Plans and SERP plans.

This naturally raises the question, Who Uses Non-Qualified Plans?   The answer is a simple one.

Executives Use Non-Qualified Plans…..

       Studies show that 91% of all Fortune 1000 companies offer a Non-Qualified Deferred Compensation (NQDC) plan to their key executives. (See 2011 Study Results of The Lockton Group, “How Truly Flexible Is A Non-Qualified Deferred Compensation Plan).

       Think about it… The most successful companies in America offer their key executives a type of retirement plan that most of us have not been offered, or are not using.  Their executives use non-qualified plans for retirement planning and wealth accumulation.

      The most popular type of Non-Qualified Plan used in Corporate America is a Non-Qualified Deferred Compensation (NQDC) Plan.  

What Does an NQDC Plan Do That A 401k Plan Does Not Do?

       NQDC Plans allow an individual to defer an unlimited amount of income on a pre-tax basis without regard to the deferral caps of 401k plans.  These Plans are authorized by Section 409A of the IRS Code which has very strict rules as to the Deferral Election, Funding and Distribution that must be followed.

       The 2015 Newport Study found that almost 75% of NQDC plans of Fortune 1000 companies are funded with Corporate-Owned Life Insurance, i.e., COLI plans. (See Article, Life Insurance: A Top Funding Vehicle in Executive Comp Plans).

      You are probably using a 401k plan for your retirement.  The executive at your bank is using a NQDC plan for his retirement.  A NQDC plan allows one to build wealth with pre-tax monies and without market risk.

What if HR Gave The Option To Use The Retirement Plan Used By The Company’s Executives?

      Many of our clients had never really considered that executives in Corporate America rely on Non-Qualified Plans for retirement planning and wealth accumulation.

       The life insurance plans used by executives is not the same type of life insurance sold to the general public, or that Suzy Ormonds or Dave Ramsey talks about.

       Executives in Corporate America use a life insurance plan that is specially designed and structured to minimize the amount of each premium payment used for policy’s death benefit and to maximize the amount of premium used for the cash value component.

        Here is a simple question: “ If your HR department gave you the option of the company’s 401k plan (i.e. ‘a qualified plan) or the Non-Qualified plan used by the company’s executives, which would you choose?”

        Remember the Value Proposition…. Executives use Non-Qualified Plans for their own retirement and wealth accumulation.  Nearly 3 out of 4 Fortune 1000 companies invest the wealth of their executives in Company Owned Life Insurance (COLI Plans).

       We encourage you, just like we encourage our clients and small businesses -- consider the model of executives in Corporate America for retirement and wealth accumulation.

Section 409A: NQDC Plans Let You Decide How Much Income Is Taxed Each Year

     Our recent article, The World of Non-Qualified Plans, addresses the proposition that executives in Corporate America primarily use Non-Qualified Plans for tax planning, wealth building and retirement planning.  That is also true for many business owners and professionals blessed to be high income earners.

   The World of Non-Qualified Plans points out there are three (3) different types of Executive Compensation Plans primarily used in the market place:

• Supplemental Executive Retirement Plans (SERP),
• Non-Qualified Deferred Compensation Plans (NQDC), and
• Executive Bonus Plans.

   In 2011, the 12,500 doctors of Kaiser Medical Group chose to participate in the company’s Non-Qualified Deferred Compensation Plan -- NQDC for short. It is the largest NQDC filed with the Department of Labor. (See Department of Labor Fact Sheet).

  That raises the natural question - “What Is A Non-Qualified Deferred Compensation Plan”.  

  It also raises the question, Why Did The Doctors of Kaiser Medical Group Choose A NQDC Plan -- and Not Just Rely on a 401k Plan?

Section 409A: The Statutory Basis for Building Wealth With Pretax Funds

   Any individual who has an interest in paying less taxes to the government should be familiar with NQDC plans under Section 409A of the IRS Code.  The individual who wants to set aside more savings on a pre-tax basis should be intimately familiar with Non-Qualified Deferred Compensation Plans under Section 409A.

   The website myNQDC.com is the most comprehensive site online for learning about NQDC plans.  It is maintained by lawyers at the international law firm of Winston & Strawn with over 850 attorneys in nearly 20 offices throughout the world.  

  The law allows you to defer an unlimited amount of income each year on a pre-tax basis.  The company’s 401k plan should not be your primary vehicle for saving taxes each year.  

   You should understand why your primary vehicle for savings on taxes each year and building wealth with pre-tax funds should be a Non-Qualified Deferred Compensation Plan.

   Under Section 409A, you can enter into an agreement with your employer to defer receipt of income and defer taxes on that income.  That is a private agreement between you and your employer.  

   If you comply with the Deferral Election Rules, Funding Rules and Distribution Rules that apply to Deferred Compensation plans under Section 409A, you and your employer can agree to defer recognition of any amount of income you want to shield from taxes.  

   NQDC plans under Section 409A allow you to decide how much income is taxed each year.

The World of Non-Qualified Plans.....

I often like to begin my presentations by sharing there are two (2) retirement systems in America.

Most people have heard of the first system.....Qualified Plans.   These consist of 401k plans, 403b plans, 457 Plans and Defined Benefit Plans. 

The second retirement retirement system is less well known... Non-Qualified Plans.  Non-Qualified plans are the vehicle used by Executives in Corporate America for tax planning and to reward, retain and recruit their key employees.

There are three (3) types of Non-Qualified Plans used in Corporate America:

• Supplemental Executive Retirement Plans,
• Non-Qualified Deferred Compensation Plans, and
• Executive Bonus Plans under Section 162 of the IRS Code.

Non-qualified Deferred Compensation Plans is the vehicle of choice for Executives and Professionals.  Why?..... A NQDC plan operates like a 401k plan but allows unlimited contributions on a pre-tax basis so long as requirements of IRS Code Section 409A are met as to Enrollment, Funding and Distributions.

Please stay in tune as we will explore the world of Non-Qualified Plans together!