A number of factors go into the analysis of whether a company is a good candidate for a non-qualified deferred compensation plan. And, while every situation is different, there are some broad characteristics experts cite as desirable.
It makes sense to start with those firms that already have a qualified plan in place, says Andrew Shapiro, national manager for the Nationwide corporate incentive program, Nationwide Financial, Columbus, Ohio. Since highly paid executives easily can hit the maximum contribution limits in qualified plans, they make likely candidates for a non-qualified deferred compensation plan. “Focus on those executives that have maxed out their contributions,” he says.
Obviously, this type of plan will only make sense if “the business has a high likelihood that it will continue in the future beyond present management and ownership,” adds Thomas Monti, vice president of distribution services, MassMutual, Hartford, Conn. It is extremely important that these companies have succession plans in place, he says.
When working on these cases with producers, Shapiro tries to assess the opinions of both the business owner and the executive as to whether they truly believe the company will be around long term.
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For example, a 40-year-old executive may be deferring income into a non-qualified deferred compensation plan today. That company must continue to operate successfully for the next 20-25 years, plus however long that executive lives through retirement, he says.