PLANSPONSOR - December 2017/January 2018 - 28

According to Jason Burlie, senior vice president and nonqualified
practice leader at Prudential Financial in Dallas, NQDC
plans boast two such areas of flexibility: the type of compensation
that can be deferred and the type of distributions. Part of
the flexibility relates to tax planning for retirement savings and
other savings goals, but employers may also offer options for type
of salary to be deferred. The Prudential/PLANSPONSOR 2017
Executive Benefit Survey found base salary and annual bonuses
were deferral sources offered by nearly all survey respondents-
by 96.5% and 90.0%, respectively. Less common but otherwise
notable compensation allowed in NQDC plans were commissions,
as well as short- and long-term incentives. The rules for
the types of compensation that may be deferred, the types of
distributions that may be incurred, and who may participate in
an NQDC plan are defined in Internal
Revenue Code (IRC) Section 409A.
NQDC plans offer value to plan
sponsors as a recruiting tool or a retainment
tool for rewarding executive performance,
according to Pesh. He says that
some plan sponsors tie these plans in
with equity compensation or profitsharing
plans and make contributions to
reward employee performance. Adding a
vesting component to the plan is a way to
retain top executives.
For plan sponsors contemplating
and the others is who makes the plan contributions. " 'Voluntary'
is what we think of as a traditional plan with participant elective
deferrals. DC SERPs, 401(k) restoration plans and DB SERPs tend
to have solely employer contributions to address contribution limitations
of qualified plans. The difference in DC SERPs and DB
SERPs is the benefit design strategy-whether the plan is aligned
with DB plan benefit design or DC plan design, " he explains.
Holton notes that a DC SERP looks the same as an NQDC
Employers
plan, but it is usually funded by employer money only. The
contribution may be a flat dollar amount, a percentage of salary
based on performance, or other company-paid amount. He says
a restoration plan is most commonly used to restore dollars lost
due to contribution limits or compensation limits, or it can be
used to restore amounts returned to executives due to failed
nondiscrimination testing.
He adds that plan sponsors mostly
often design
their NQDC
plan similarly
to their
whether they should offer an NQDC plan
to employees, Holton says, " Generally
speaking, there is a flat savings crisis in
the U.S., so, just as a starting point, the need for any individual
to save enough for retirement exists. " He notes that qualified
plans do well for rank-and-file employees, but, as income levels
increase and statutory limits are met, it becomes more difficult
for highly compensated employees to have money set aside in
employer-sponsored programs.
Pesh says if a plan sponsor has problems with nondiscrimiqualified
plan.
use
NQDC plans, rather than SERPs, and
do so to accomplish multiple objectives.
According to Pesh, employers often
design their NQDC plan similarly to
their qualified plan. If they have a match
in their DC plan, it will be extended in
the NQDC.
Plan Funding
NQDC plans are considered unfunded,
and there is no obligation to set aside
funds for the plan, Holton says. Plan
sponsors may pay benefits out of operating
cash, or they may set aside assets
in a rabbi trust-an irrevocable trust in which tax-deferred
contributions are invested-and buy an asset that will track what
account balances are doing. Plan sponsors may also purchase
taxable mutual funds; in that case, their NQDC plan will look
like their DC plan, either with a mirror investment menu or an
investment menu with different fund choices.
Although there is no obligation, it is prudent for NQDC
nation testing, this may indicate that it should offer an NQDC
plan. Plan sponsors may fail average deferral percentage (ADP)
or average contribution percentage (ACP) tests if the ratio of
highly compensated employee contributions to non-highly
compensated employee contributions is too high, resulting in
refunds to the HCEs.
Plan Design
According to the Prudential/PLANSPONSOR survey, two-thirds
of plan sponsors that offer an NQDC plan provide a voluntary
deferred compensation plan: Specifically, 28.6% offer a defined
contribution supplemental executive retirement plan (DC SERP);
22.3%, a 401(k) restoration plan; 20.9%, a defined benefit supplemental
executive retirement plan (DB SERP); and 8.3%, a 457(b)
or a 457(f) plan.
Burlie says the biggest difference between voluntary plans
28 PLANSPONSOR.com December 2017-January 2018
plan sponsors to set aside money for the plan, Pesh observes.
Companies may use mutual funds or life insurance. Two keys
to help a sponsor choose a good plan funding strategy are the
sponsor's financial situation and the time horizon of the plan.
Firstly, does the sponsor have enough operating cash to cover
the payout of benefits? Mutual funds work well when inadequate
cash is going into the plan, Pesh says.
Life insurance offers more cash flow; here, the sponsor
can consider the cash value of the insurance policy to pay the
benefits. As the sponsor owns the assets, it should factor in the
tax implications. The cash value of life insurance grows, taxdeferred,
even when rebalancing general funds, Pesh says. On
the other hand, mutual funds, when rebalanced, may move from
one fund position to another, which is a taxable event for the
plan sponsor. However, when cash flow in the plan is variable,
life insurance will fail to work as well, because premiums may
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