Imagine your key employee comes to you and tells you he is leaving. He has been hired by a competitor. After you get up off the floor you ask yourself what could I have done to keep my key employee happy and satisfied? You paid him a good salary, gave him three weeks off for vacation, provided health insurance, a 401K plan and yet he still left. Other than make him a stockholder or partner, what else could you have done? In today’s competitive environment, business owners are seeking ways to reward their key employees in order to keep them motivated and retain their services. A Non-qualified Deferred Compensation Plan provides a business with a way to provide generous benefits to only selected, key executive employees. The employees can be selected by criteria such as meeting certain stated goals and/or staying with the business for a stated period of time.
A Non-qualified Deferred Compensation Plan is a written agreement between a business and key executive. The business makes a contractual, unsecured promise to make future payments to a key employee if the key employee meets certain stated requirements. The payments may be based on a number of factors and the flexibility is almost unlimited. Traditionally, the Non-qualified Deferred Compensation Plan provides significant benefits to the employee at retirement or to the employee’s beneficiary if the employee dies before retirement. Disability benefits can be incorporated into the plan as well. The business receives a tax deduction when payments are made and the employee receives the benefits as taxable income.
Some of the benefits to the business include:
- Helps the business recruit, retain, reward and retire key employees.
- Allows the business to select the key employee(s) they want to reward.
- Avoids most “ERISA” compliance rules required of Qualified Retirement Plans.
- Gives the business control over plan benefits.
- Provides “Golden Handcuffs” to lock in key employees.
- Can offer the business complete cost recovery.
- Rounds out a business’ benefits package by providing additional benefits to any existing Qualified Retirement Plans.
Some of the benefits to the employee include:
- Enhances existing retirement savings.
- Supplements existing qualified retirement plans.
- Provides additional pre-retirement death and disability benefits.
- Defers taxable income until benefits are paid.
- Non-qualified compensation arrangements provide an attractive way for employers to provide benefits that help recruit, reward, and retain key employees. The flexibility available in these arrangements, coupled with relative lack of government regulation, continue to make these attractive to employers and employees.