Advisor Rik Wehmeier: Salary, bonuses, commissions and other incentive compensation may be deferred, and as much as 100% less the FICA/FUTA taxes. The company decides what compensation is eligible and the participant decides how much to defer in a given year. Some companies shadow their qualified plans and elect to make-up the same percent loss of deferrals to the executives. Others allow more. Some companies allow larger percentages of bonus compensation to be deferred than salary. In designing plan, there’s a lot of flexibility available. It’s important to contemplate the short-term and long-term effects of each feature, and to revisit the goals and performance of the plan from time to time. We audit plans we didn’t design quite often.

Advisor Bill Folan: The workings of qualified plans like the 401(k) are essentially similar to most nonqualified deferred compensation plans. People differentiate these two plans because in 1974, the federal government’s employee retirement act (ERISA) dealt with the expanding role of employers providing for retirement in America and set down regulations about how retirement plans would be designed, set limits and rules that would qualified them under the resulting tax code. Hence, these are called “tax qualified” or “ERISA qualified” or simply “qualified” plans. Plans that fall outside these rules are “nonqualified” plans. True, nonqualified plans to not get the same security or tax treatment as those under ERISA, but they are also not restrained by the federal Act.

Advisor Bill Folan: Employees, outside directors of the Board, and independent contractors may be eligible for these plans.

Advisor Bill Folan: Not at all. These plans can be mistakenly perceived as limited to just a few highest paid individuals. However, deferred compensation plans are applicable to many employees, especially at large companies. The average annual deferral amount is under $18,000 per year, which is not that different from the qualified plan annual contribution limit. Most HCEs have annual salaries between $150,000 and $300,000, so these participants are not necessarily the uber-rich. They are management employees who realize that deferring $15,500 into their qualified plans is not going to get them to their desired retirement lifestyle. As retirement programs have shifted from pension style benefit plans to employee-directed defined contribution plans, the nonqualified plan has become an accessible, additional layer to retirement planning and personal wealth accumulation.

Advisor Rik Wehmeier: I think the recent COLI Best Practices Provisions framed these issues very well and provided a positive national discussion on the importance of adding security to these nonqualified benefit plans. Corporate owned life insurance (COLI), mutual funds and other funding vehicles present advantages and disadvantages depending on a company’s situation. But the idea of providing some reserved asset to pay for retirement obligations is very reasonable. It’s rather difficult to argue that the amounts an employee defers into the nonqualified plan should be any less secure than those deferred to the qualified plan. Or, that the amounts in the nonqualified plan should be subject to the claims of creditors if the company has financial problems. The employees have deferred their pay they would otherwise have.

Advisor Bonnie Petersen: Balser provides state-of-the-art recordkeeping and exceptional deferred compensation plan administration for large employers including both unfunded and informally funded plans. We focus on custom plan administration, offering a wide range of solutions, and it is not expected Balser handle the COLI services while providing the day-to-day recordkeeping and reporting. Since Corporate owned life insurance (COLI) is the most popular and cost-effective informal funding for many, Balser offers COLI services including COLI illustration, COLI analysis of current products, COLI product negotiation, COLI implementation and policy administration, reserved asset / aggregate liability reporting, and more.

Advisor Kif Cahillane: Nonqualified plans often allow shorter-term deferral periods of as few as 3-5 years, which provides a meaningful option for executives and their tax and event planning. Short term deferrals give your employees options. For example, one year’s large bonus could be deferred and distributions could be in 5 annual installments. Or, an executive may schedule payouts in the future years her child is expected to need college tuition.