How To Give Extra Pay To Top Employees

Suppose you are an employer and you want to offer your top executives an additional financial benefit that is separate from corporate profit sharing and the 401(k) plan. There are a number of obstacles that stand in your way, particularly tax ones. How are you? We asked Bruce Bell, an attorney in the Chicago office of Schönberg Finkel Beederman bell glazierfor some hints.

Larry Light: I suppose there are differences to the standard service level agreements and the kind we are looking at.

Bruce Bell: There is. Qualified retirement plans, such as B. Profit-sharing and 401(k) plans have many legal requirements. But the plans we’re considering here, called nonqualifying deferred compensation plans, or NQDPs, have far fewer such limitations. However, they are subject to some legal restrictions. Failure to meet them can result in high tax penalties.

Light: What rules apply to NQDPs?

Bell jar: First, the employer can only pay out money after certain events have occurred, such as death, disability, termination of employment, change of control in the company, or on a specific date or other triggering event.

In addition, the distribution of plan benefits can only be accelerated under certain circumstances. And if the plan is retired, there are restrictions on when participants can receive their plan benefits. In addition, the participants cannot usually change their previously determined form of distribution.

Light: What are the penalties?

Bell jar: higher taxes. Participants in an NQDP are taxed at their regular income tax rates plus an additional 20% income tax and interest on the tax. Plan errors can be corrected, but this must be done relatively soon after they occur. Because NQDP operational failures are often not discovered for a year or more, tax costs can be crippling.

Light: What else should I watch out for as an employer?

Bell jar: Qualified plan rules have reporting and disclosure and other requirements that might still apply to NQDPs. An NQDP sponsor will typically want to structure the plan to avoid them. The most common way to do this is to limit plan participation to a select group of highly paid employees.

Since there are no strict guidelines as to what constitutes high pay, compare the people you want in the NQDP plan to the total number of employees in the company. Suffice it to say that the number of NDPQ participants must be much less than the total number of employees.

Light: What else?

Bell jar: Basic plan design. You must decide how much you want to contribute to the plan and whether the company, the employees, or both contribute. Also whether to include a vesting schedule to encourage employees to stay with the company. And if attendees lose their benefits if they leave and compete with you or try to poach your employees or customers.