Highly Compensated individuals are unable to save enough pre-tax dollars in their 401(k) and Profit Sharing plans to adequately create enough retirement income. It is incumbent on them to then save more dollars to close the retirement gap.

  • Highly Compensated individuals typically expect to retire at 80% of their pre-retirement income; however, qualified plans are limited on what percent of compensation can be saved.
  • The gap in retirement savings is due to lost benefits created by legislative restrictions– $19,000 maximum deferral limit into 401(k) plan (2019) plus $6,000 “catch-up” provision for participants over the age of 50.

Benefits of the Nonqualified Deferral Plan

  • Allows highly compensated employees to defer pre-tax income above 401(k) limits
  • Credits account balances with the same rate of return earned in the 401(k) account or a fixed rate option
  • Allows employers to make up lost 401(k) contributions (match or profit-sharing)
  • Tax-deferred earnings – more dollars compounding on a tax-deferred basis

Important Differences Between Qualified and Nonqualified Plans

  • Nonqualified plans are regulated by IRC Section 409A
  • Nonqualified plan participants are unsecured creditors and subject to risk of forfeiture (bankruptcy of employer)
  • In nonqualified plans, the corporation defers the tax deduction on any contributions and/or deferrals until paid to the executive
  • In nonqualified plans, liabilities must be accrued and plan assets remain on corporate balance sheet and any taxable investment earnings are reportable by the employer
  • Nonqualified plans are not protected by ERISA and are not subject to the reporting, funding, vesting, or fiduciary responsibilities of Title I of ERISA
  • Nonqualified plans must satisfy Top Hat Rules