Non-qualified deferred compensation plans are a type of executive benefit that can benefit the organization and the employee. For the business, it is an opportunity to improve the retention of key employees by providing a financial incentive to stay with the company, thus reducing turnover costs. It is an opportunity for employees to receive a higher income than they would otherwise receive if they left their jobs.
NQDC plans are subject to strict compliance rules, including limitations on the amount of compensation that can be deferred, the types of investments held in a qualified plan, certain restrictions on loans from an NQDC plan, and notice requirements for participants. In addition, participants must be provided with annual information reporting about their NQDC accounts. They must receive certain distributions from an NQDC account when they reach age 65 or 70½ or upon separation from service.
The following list provides some pros and cons of non-qualified deferred compensation plans:
Pros of NQDC
There are several advantages associated with these types of plans:
Unlimited Savings and Tax Benefit
You can save as much money as you want for retirement without losing any portion of it due to taxes being taken out of your paycheck. This allows you to save more money every year than if you had been forced to pay taxes on the total amount each time it was deposited into your account.
Easy set-up
The second benefit of this type of plan is that it’s easy to set up and manage yourself. There’s no need for an administrator or anyone else to handle your accounts or paperwork. Everything is dealt with by you alone or with help from a financial advisor if necessary. This helps keep costs down and makes things much more accessible than they would be otherwise since it doesn’t require additional funds or time on your part to manage everything properly.
Educating employees
Non-qualified deferred compensation plans are a great way to educate employees on the benefits of saving for retirement. You can set up an employee education program that offers incentives for employees who save money through the plan. You can also provide advice about how much employees should be saving each year, how much they should be contributing to their 401(k), and other retirement planning tips.
Providing financial security
Many companies offer non-qualified deferred compensation plans because they want to provide financial security for their employees after retiring or leaving the company. This is especially true in industries with high turnover or job openings that are hard to fill. In those situations, it’s beneficial for companies to offer money now to keep talented workers who might otherwise leave because they need more money right away.
Reduced turnover
When employees know what is available to them and how it works, they are less likely to leave your company for another job. When you have a high turnover rate, it can be difficult for your business to grow because of a lack of experienced workers.
Faster growth
With a qualified retirement plan in place, you will see increased profits by allowing employees to invest their money in tax-deferred accounts. This helps them save for retirement and will enable them to get out from under taxes each year. You can also use these accounts to offer bonuses or incentives without paying out cash directly.
Cons oF NQDC
Non-qualified deferred compensation plans are not as valuable to employees. They have some drawbacks that make them less attractive than qualified plans, but they can still be effective in helping employees save for retirement. The drawbacks include:
Can be riskier to employees than qualified plans
They may not be able to receive distributions if their employer goes bankrupt or becomes insolvent. This is because there is no guarantee that the company will be able to pay out the deferred compensation upon an employee’s termination from employment. Due to market fluctuations and interest rate changes, they may lose their investment value. While this can also happen with qualified retirement plans, it’s less likely because qualified retirement plan assets are held in trust by a third-party administrator on behalf of participants who can only withdraw funds after reaching retirement age or leaving employment with your organization.
No Early Withdrawal Provision
You can’t withdraw your money, or at least not all of it until you reach the age of 59 1/2. If you leave the company before that time and need the money to pay bills or buy a new home, you will be out of luck.
The Money Must Stay With Your Employer
If you leave your job within six months of starting your NQDC plan, then the funds must be returned to your employer within 30 days after leaving employment with them. If this does not happen, then penalties may be assessed against both parties involved in this transaction for failure to comply with IRS regulations governing these types of plans.