EXECUTIVE BENEFITS: The Rise of Non-Qualified Plans

January 10, 2023

2 minute read – “I want to give my “MVP Employee” more than just access to our 401(k) and the Profit Sharing Plan, and it would be nice to have some control over it, some ‘stickiness’.”

This is a case for a non-qualified deferred compensation planning using life insurance. Non-qualified plans open a broader range of plan design for certain people. Unlike a qualified plan, such as a  401(k) or related that has to adhere to ERISA guidelines, and is designed with all of your eligible employees in mind.  That first option is a great area to start looking at ways to design an Executive Bonus.

Various ideas to consider with 5 key questions:

  1. Do you want strings attached, like retaining the ownership of such plan, directed by some form of a vesting?
  2. Do you want access to some or all of the death proceeds from the life insurance policy used in such cases protecting/providing for the individuals loss to the corporation or partnership?
  3. Would you like to include the employee in on a portion or all of the death proceeds, having them elect the beneficiary?
  4. Is having an immediate tax deduction to the corporation or partnership essential? Or, can this be delayed to meet the vesting schedule (see number 1)?
  5. Is recovery of all or part of the plan cost essential if the key employee cuts and runs sooner than you expected?

Recently a successful plan design based on answering these questions ahead of time was introduced to a client. At first, the comment was “But, this is life insurance!” Through our process and evaluation hands-down the best solution was use of a life insurance contract. From the Economic Benefit rather than income tax choices for the key-employee. To, assurance that a key employee’s financial value being insured due to the cost of replacement calculated, for the employer, there are multiple of avenues to discover in the design of a executive bonus, or, key-person deferred compensation plan when we look at non-qualified plan considerations.

Summary:

Although these concepts and plan designs are nothing new, since 2021 we’re finding that employers are looking for more than offering a 401(k) and Profit-Sharing Plan for certain employees. Even the year-end bonus is not enough for these types of MVP’s. Non-qualified deferred compensation planning is a natural discovery process employers have  renewed interest in, offering this to more than the CEO, CFO, COO, etc.

Contact: [email protected]