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– $18,000 maximum deferral limit into 401(k) plan (2017) plus $6,000 “catch-up” provision.
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Based on a participant beginning at age 45, retiring at 65, assuming 2017 Social Security maximum contribution based on $127,200 wage base; and 401(k) contributions at seven percent of compensation up to 2015 maximum of $18,000. Includes catch up payment beginning at age 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