Finding methods for well-compensated executives to optimize their tax-deferred saving power is high on the priority list of many boards of directors.
Because limitations placed on qualified benefit plans mean proportionally less savings for a companys most highly paid executives, especially regarding 401(k) plans, employers are increasingly looking to non-qualified deferred compensation plans to close the gap, according to Aon Consulting.
Nearly 85% percent of the Fortune 1000 companies have implemented some type of NQDC plan for their executives, Aon says.
The maximum dollar amount that can be deferred annually in a 401(k) plan is $10,500–an amount that will rise to $15,000 if legislation awaiting President Bush is approved. NQDC plans are a way to get past that 401(k) maximum contribution limit. Participation is limited to a select group of highly paid executives; NQDC plans give those executives all the benefits of 401(k) plans without limits on contributions, says Aon.
Non-qualified plans are not meant to be just another pension plan, says Steve Parrish, second vice president, individual markets, Principal Financial Group, Des Moines, Iowa.
“If the company says, Im going to put $10,000 away for you, but you dont have a right to it right now, thats deferred compensation,” says Parrish. “But the government is saying, you cant make this promise, fund it, and then turn around and give the executive access to an actual account; that would be the equivalent of current compensation. But if the company chooses to informally set aside money as a means to fund their promise to the executive, the government says thats not our business.”
Either the executive or the employer decides where the contributions will hypothetically be invested. The contributions are referred to as “hypothetical” only because they are not formally being invested; they are actual investments.