United States

Aligning executive plans with traditional employee plans


How can you create a plan design that attracts and retains highly compensated employees? What are the opportunities in non-qualified plans?

Anne Bushman, a compensation and benefits specialist with RSM's Washington National Tax Office, and Mary  Draayer, a director with the RSM US Wealth Management practice, discuss how companies can align executive plans with traditional employee plans.

Following are answers to questions submitted during our live webcast:

Does S corporation status restrict non-qualified plan implementation?

No, any entity can set up a non-qualified deferred compensation plan. The consideration of entity type relates to who the participants will be—if they are all owners of a flowthrough entity, the benefit of deferring income is offset by the deferred deduction.

Can a non-qualified plan be administered side by side with a 401(k) plan?

Yes, a non-qualified plan is in addition to a qualified plan. Many companies implement qualified plans like a 401(k) first, and then add a non-qualified plan as the business grows to provide additional incentive to management.

When offering a non-qualified plan, are there two plans for all employees and owners?

Employees who are selected for the non-qualified plan may have two accounts. Keep in mind non-qualified deferred compensation plans are not open to all employees but a select group of highly compensated individuals and possibly owners.

Should, or can, an employer require participants in a non-qualified deferred compensation plan to max out contribution to the 401(k) plan in order to participate?

Qualified and non-qualified plans can be designed to work together; however, there are specific deferral rules in section 409A and contingent benefit rules under the regulations that relate to section 401(k) that must be carefully considered. A design of this type could violate one or both of those rules if not set up properly so it is best to seek qualified advice before doing so.

We have a safe-harbor 401(k). Does offering this type of plan reduce the need for an additional plan?

Not really. A safe harbor plan eliminates the problem of executives receiving refunds because of the lower participation level of non-executive employees. However, a safe harbor plan does nothing to help executives that would like to defer more than the annual 401(k) limit ($18,000 in 2017). Many executives would like to contribute substantially more than that amount. In addition, an employer can tie the benefits under a non-qualified plan to the company’s performance metrics to incentivize performance that is aligned with strategic goals of the business. Alternatively, the company can use longer vesting periods with respect to the company-funded benefits in order to encourage executive retention (the golden handcuff approach).

When is it required to notify the Department of Labor (DOL) about a non-qualified plan?

The requirement is to file the top hat notice within 120 days from the plan's effective date. The DOL also has a late filing process to follow if you miss that date.

What is an example of accelerating payments?

In general, section 409A prohibits accelerated or delayed payments based upon the time stated in the agreement. In certain limited situations, an exception may apply. The exceptions that may apply to accelerate a payment that is subject to section 409A are accelerations to comply with certain legal requirements as specified (for example, but not limited to, a divorce decree, a domestic relations order or withholding of certain taxes) or plan termination (which follows very specific provisions).  In all events, the exceptions should be reviewed carefully to determine if they apply.

To clarify, the company can set aside via separate account at its election so long as that account is available to creditors. Is that correct?

Correct.  The company can save the money in anticipation of the future payout, but it remains a general asset of the company, accessible to general creditors, essentially like any other investment account the company may have.

We have full-time employees who are hourly and fall under the Service Contract Act (SCA). We must adhere to the prevailing wage and fringe benefit requirements. Would we be able to put any remaining prevailing wage funds into a non-qualified plan?

A non-qualified deferred compensation plan is not a permitted fringe benefit plan for purpose of prevailing wage payments. An employer needs to meet its prevailing wage obligation by either payment in cash as wages or by making payments to certain bona fide fringe benefit funds. With limited exception, an unfunded plan, such as a non-qualified deferred compensation plan is not a bona fide plan. There is specific reference in the SCA regulations that says that a non-qualified plan is not a bona fide plan for this purpose.

Is a non-qualified deferred compensation plan similar to or the same as a non-qualified stock option plan?

Non-qualified deferred compensation can be similar in many respects to stock options because you can discriminate in who receives it and you may choose to tie the payment of the non-qualified plan to the stock value of the company. However, it is very different in that a deferred compensation plan involves a cash payment in the future, rather than the participant have the opportunity to buy shares of company stock at a discount (once the options vest).

Can funds be used to purchase company stock? Would that be considered to be a distribution for the participant?

Non-qualified deferred compensation is paid out in cash upon a distribution event. That cash is then the participant's money to do with as he or she chooses so it is possible that company stock is purchased, but in most events, it is cash compensation that would not be used to purchase company stock.  The amount of the cash payment may be tied to the value of company stock if the plan is designed that way.

For 457(f) plans, is the 25 percent employer match still the safe harbor guidance for meeting the substantial risk of forfeiture requirement?

The IRS issued proposed regulations under section 457(f) in 2016 that indicate employees can defer compensation and have it be treated as subject to a substantial risk of forfeiture if certain conditions are met. One such condition is the amount received must be materially greater which is defined as more than 125 percent of the amount the participant would have received absent the new or extended substantial risk of forfeiture. The proposed regulations have not been finalized but can be followed prior to that date.