Non-qualified retirement plans are frequently offered to highly compensated employees and executives as a supplement to qualified retirement plans that have limitations and restrictions. Employers view these plans as a valuable employee retention tool for key executive and management personnel. Watkins Ross assists clients in valuing and maintaining all types of non-qualified plans and we work with clients’ legal counsel in determining how to best design a non-qualified plan to coordinate the benefits of the non-qualified with current and past qualified retirement plan offerings.
There are several types of non-qualified retirement plans. Some are individual account plans which allow an employee to defer receipt of current income, or an employee may credit a specific percentage of an employee’s current salary. Individual account plans typically credit some type of “earnings” to the employee’s account using one of these methods: Credit the account with “hypothetical earnings” based on certain company performance measures, credit a specific rate of return on the deferred amounts, or the employees maintain a hypothetical account in which they may make hypothetical investments to determine the earnings. Other types of non-qualified plans are equity based. Phantom stock plans credit employees with a certain number of “hypothetical shares” which the employee “redeems” at a later date. Stock appreciation plans credit an employee with the net appreciation on a specified number of “performance shares”.
A significant difference between a non-qualified deferred compensation plan and a qualified retirement plan is that the employer may NOT deduct the deferred compensation at the time the benefits are earned. Instead, the employer’s deduction is postponed until the employee’s receipt of the compensation. Another significant difference is that amounts deferred in a non-qualified plan are not protected in the event of the employer’s bankruptcy. The assets in the plan remain subject to claims of the employer’s general creditors. Therefore, if the employer defaults, there are no assurances that the deferred amounts will ever be paid to the employee. In this scenario, the employee becomes another unsecured creditor of an insolvent company.