non-qualified deferred comp

(nqdc) plans

NQDC Plans are the most robust vehicle under the IRS Code for personal tax savings.

These plans operate like a 401(k) plan but do not have the contribution limits of these plans. One can defer an unlimited amount of income to one's NQDC plan.

A Working Example.....

The executive or professional earning $500,000 a year faces the following taxes:

Federal Income Tax........................ 39.6%
State/Local Taxes............................ 10%
Social Security................................. 6.2% (up to statutory limit of $118,500)
Medicare Tax................................... 1.45%
Medicare Additional Tax.................. .9% (at joint income of $250k)
Medicare Surtax................................3.8% (at joint income of $250k

Total Tax Rate........................................61.65% on first $118,500 of income

Total Tax Rate after S.S. Ceiling............55.45%

As to the last $100,000 of income, our executive pays $55,450 to the government. He is left with $44,5000 to invest.

Should he invest the $44,500 in stocks and bonds, he faces a capital gains tax of 15% to 20%.

A NQDC plan defers payment of the federal and state taxes. Instead those monies are invested in the company's NQDC account, working on the executive's behalf until the distribution date occurs.

supplemental executive retirement plan

(SERP PLANS)

SERP PLANS are fully funded by the employer.

These plans are used to recruit and retain executive talent by offering a guaranteed retirement benefit in exchange for years of service.

A Working Example....

A franchise of American Family Care wants to recruit and keep a physician for long term employment. The franchise is recruiting a 45 year old physician and offers to fund a retirement plan that will generate $100,000 a year for 20 years of service.

The plan has vesting options so the physician receives a different guaranteed amount based on years of service:

o $120,000 – 20 years of service – Income at age 70 for 20 yrs,

o $110,000 – 15 years of service – Income at age 70 for 15 yrs,

o $ 95,000 – 10 years of service – Income at age 70 for 10 yrs,

o $ 80,000 – 5 years of service – Income at age 70 for 5 yrs.

SECTION 162 EXECUTIVE BONUS PLANS

Section 162 bonus plans are owned by the individual executive. Executive bonus plans provide an opportunity for tax-strategies with after tax monies. The employee gets the benefit of tax-deferred growth and can access the policy on a tax-free basis.

The company pays the premium on a policy owned by the executive.
The payment by the company represents W-2 income to the executive.
The payment is also deductible immediately by the employer.
Many companies will pay a 'double bonus' to cover the taxes due from the initial premium payment.