Frequently Asked Questions

What is a non-qualified plan?

Answer: As the name itself implies, it is a retirement plan that is not qualified under IRC Section 401. Non-qualified plans are exempt from most of the reporting requirements under the top-hat provisions within Title 1 of ERISA.

I keep hearing about “reverse discrimination”. What is it?

Answer: This is a form of economic discrimination that affects the highly compensated employees in a company who cannot derive sufficient retirement income from their qualified plans due to the government limits.

Why is a Rabbi trust so important to the success of a non-qualified plan?

Answer: A Rabbi trust, which is also a Grantor trust, is particularly useful for the participant in a non-qualified executive benefit plan, since it will protect those plan assets from either change of control or change of heart.

Can these non-qualified plan solutions be effective for the not-for-profit /tax-exempt as well as the for-profit employer?

Answer: Yes, for the not-for-profit / tax-exempt employer, there are specific plan provisions under section 457 (b) & (f). Provisions under 457(f) are currently being reviewed and amended by Treasury at this time.

What is IRC Section 409A?

Answer: This is the section of the IRS code that governs the design, funding and administration of non-qualified plans. The guidelines for these plans were finalized as of January 1, 2009.

What is a deferred compensation plan?

Answer: It is a non-qualified retirement plan that provides for the pre-tax deferral of W-2 compensation until a date certain in the future or retirement. It is a great financial planning tool for the highly compensated executives.

Why are the assets of a non-qualified plan subject to the claims of creditors?

Answer: Non-qualified plan assets are required to be at risk and therefore subject to the claims of creditors in the case of a company bankruptcy. This substantial risk of forfeiture is required in order for there to be a deferral of taxation.

What does the term “Top-Hat” mean?

Answer: Top-Hat is a term used to define those highly compensated executives in a company who are eligible to participate in a non-qualified plan. As defined under DOL, these executives are generally among the top 5-10 % of the employee population in a company.

What will happen to my non-qualified deferred compensation account in the event of a change of control?

Answer: If a change of control provision exists within the plan document, this language will define the distribution. In this event, most plans are terminated and distributions made in a lump sum.

What is the most important component of a well-designed non-qualified plan?

Answer: It is flexibility. Flexibility can be further defined among others as the allowance of in-service distributions to provide for one’s unique personal financial planning needs.

What is the best funding alternative for non-qualified plans?

Answer: There are three primary funding options: unfunded, mutual funds, corporate-owned life insurance (COLI). Oftentimes, companies will utilize one of these or a combination depending upon their tax and financial circumstances.

What is a SERP?

Answer: A SERP is a non-qualified employer funded Supplemental Executive Retirement Plan. It is often used by employers to supplement the qualified retirement plan income of their senior executives, which are restricted due to the qualified plan limits on DB and DC plans (i.e. “reverse discrimination”).