In terms of design features non qualified plans are

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as taxable income in the year in which it is received (2020). In terms of design features, non-qualified plans are more flexible than qualified plans . A sponsor can design almost any structure that they want. These plans usually fall outside of the supervision of ERISA. Because of the reduced regulatory oversight (meaning lower compliance testing costs), non-qualified plans are therefore less costly to administer. Non-qualified plans can be used to legitimately favor the highly compensated employees. As such, they are a great recruitment tool! Read this document for additional information on non-qualified deferred compensation plans. Consider another company called Johnson Fabricators. They are a very small company with only 10 employees in total. Two of the employees are also the owners and they each earn $100,000 per year. The other eight employees earn a total of $240,000 (an average salary of $30,000) per year. If Johnson Fabricators decided to implement a profit-sharing plan with the maximum 25% contribution, then the cost to the employer would be $110,000 (25% x [$100,000 + $100,000 + $240,000]). However, if the company decided to instead offer a 25% non-qualified deferred compensation plan to only the two owners, which is completely legal, their total cost would be $50,000 (25% x [$100,000 + $100,000]). The company will also have an incremental loss from not having a current tax deduction and the opportunity cost of any investment gains on the money that would have been saved as a result of the tax deduction. They would still receive a corporate tax deduction when the funds were ultimately taxed to the employee/owners. Even if we estimate the combined tax and opportunity cost expense to be $25,000 then the total “cost” of offering the non-qualified plan is still only $75,000 compared to $110,000 with the other alternative. This example ignores the administrative costs, but they will be lower in a non- qualified plan and this will further amplify the cost savings. The obvious objective of a non-qualified deferred compensation plan is to attract and retain key executive talent. If an employer wants the best people, then they must be willing to pay for it. In essence, the non-qualified plan is a supplemental layer of benefits. Think of it as the top tier on a two- tiered cake. An employer’s qualified plan provides a nice base on which to build. The non-qualified plan is the upper layer where most of the decorations are displayed. How could a non-qualified deferred compensation plan uniquely benefit start-up companies? Start-ups are not known for being cash rich. In fact, they are usually levered (in debt) as much as possible. They can use non-qualified deferred compensation plans to attract key people necessary for success and then pay them once their business has taken off and has plenty of cash. There is more risk on the table for the participants in this case because the start-up might not take off. It might actually flop big time and the participants would lose all deferred compensation. To adjust for this increased level of risk, start-ups will often offer very generous non-qualified plans.
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  • Spring '14
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