Key Considerations for Participating in a Nonqualified Plan

A nonqualified plan can be an important benefit and may help you recruit and retain top talent. As the business owner, you are probably among the highest paid employees at your company and therefore you might benefit from nonqualified deferrals. So as you think about whether to set up a nonqualified plan for yourself and key personnel, ask the following questions:
  • Have I maxed out my traditional retirement plans? If the IRS limits on qualified retirement plans such as 401(k)sSIMPLE IRAs y SEPs are keeping you from saving a large enough percentage of your compensation to fund your retirement, a nonqualified plan will allow you to save a lot more.
  • Do I need a way to save for non-retirement life events? A nonqualified plan can provide deferred payments at a specified future date, allowing you to save for certain life events, such as a child’s college education.
  • Could I benefit from deferring income taxes until a later date? Contributions to a nonqualified plan will lower your current income taxes (you must still pay Social Security and Medicare taxes). You will owe taxes when you receive your plan payouts so it provides a way to manage the timing of your tax payments prior to retirement.
  • Is the company financially secure enough to make future plan payouts? The company is promising to pay the deferred salary at a future date, so you and your highly compensated employees must feel confident that the money will be there when needed.
  • Could I afford to lose the deferred salary? Nonqualified deferrals are part of the company’s general assets and available to creditors in the event of bankruptcy.

Game Plan

Before you add any type of retirement or savings plan to your employee benefits package, talk to your tax professional and financial advisor. They can help you determine which type of plan – qualified, nonqualified, or both – is best for your business.
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