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.

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.

“There had better be some plan for that small business to continue for 40-50 years,” Shapiro says.

Companies that may be potential prospects should be able to project a fairly certain stream of income, adds John Oliver, vice president strategic marketing services for Transamerica, Los Angeles, Calif. “A company thats solid, thats growing and has good cash flow. They can reasonably project that they can accommodate a program at least out five years,” he says.

Once agents find the right prospect, it is important to select the right key employees to participate in the plan. “You want to work with a key employee that has been employed by the company for a number of years,” adds William Gettings, a partner with Gettings Reed Financial Services, Lafayette, Ind.

Gettings notes that while some employers may select new employees who they feel are key to the firm, its not always a good idea to include them in the plan until theyve been with the company for a number of years. “I think you need to wait until that employee becomes seasoned,” he says. In some cases Gettings has worked on, plans have failed because companies didnt follow this rule. “I have found that it doesnt work if you start with someone the firm identifies as key but theyre relatively new–turnover happens,” he says.

Barry Higgins


Reproduced from National Underwriter Edition, June 23, 2003. Copyright 2003 by The National Underwriter Company in the serial publication. All rights reserved. Copyright in this article as an independent work may be held by the author.