An Overview of Nonqualified Plans

To recruit and retain high-value executives in today's marketplace, companies must develop a total compensation strategy that encompasses a benefits program to supplement traditional salary and cash bonuses.

A "qualified" plan, such as a 401(k) plan or pension plan, is subject to restrictive regulations under the federal Employee Retirement Income Security Act (ERISA), and therefore the benefits of these plans to executives and senior managers are relatively limited.

By contrast, "nonqualified" benefit plans - which do not "qualify" under ERISA regulations - are not subject to ERISA restrictions, allowing for greater flexibility and offering significant advantages to both the company and the executives.

For example, under a nonqualified deferred compensation plan, an executive may be able to choose to defer all or part of the upcoming year's salary and/or bonus. By so doing, the executive lowers the amount reported on the W-2 to the IRS and consequently lowers current income taxes for the year. Thus, the executive can invest "pre-tax" dollars and earn a return on the deferred tax itself. Pay the government or pay yourself—under a nonqualified plan it’s your choice—it’s up to you. Deferral elections can be made annually for the following year's anticipated earnings. Salary, bonuses, incentive awards and other forms of cash compensation may be deferred prior to such compensation being earned. Currently various forms of equity compensation may also be deferred under current tax law.

Once the money is deferred, under our plan designs, the executive has the opportunity to invest in a broad array of mutual funds or comparable asset types. As long as the investments remain in the deferred compensation plan, the participant's balance continues to grow on a tax-deferred basis (i.e., there is no annual tax liability for the participant on gains or dividends). The corporation owns the assets, which may be mutual funds themselves or comparable investment choices within an insurance product. The insurance component can defer or possibly eliminate the employer's tax liability on gains
in the underlying assets.

Listed below are a few bullet points showing the potential benefits to the participant and to the employer:

For participants:	For the corporation:
Tax deferral	Powerful executive retention tool
Investment of pre-tax dollars	Cost-neutral plan design
Broad investment spectrum for diversification	Little or no service or administration fees
No-penalty scheduled in-service withdrawals	Full outsourced plan administration
Yearly deferral amount election	No incremental headquarters staff requirement
Online account access and updates	Online plan access and reporting

This is an extremely general and non-complete description of nonqualified deferred compensation plans. This is an overview only; it is not intended as an offer to sell or as tax or legal advice.

Please contact us if you would like a more detailed explanation of this approach to compensation, or for more information on other nonqualified plans.

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