Non-Qualified Plans

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Non-qualified plans are types of retirement savings plans that do not adhere to the Employee Retirement Income Security Act (ERISA) guidelines. Generally, non-qualified plans are utilized to give highly-paid executives additional options for retirement savings. 

A deferred compensation plan withholds some of an employee’s salary until a specific date, usually at retirement. The lump-sum owed to the employee is paid out in full on the specified date. A non-qualified deferred compensation plan is a written agreement between an employee and their employer which defines an amount to be withheld, invested, and then given to the employee at some time in the future.

An executive bonus plan, sometimes referred to as section 162, is how business owners and companies can benefit executives or other key employees. The business can use tax-deductible company funds to provide an executive bonus plan to key individuals of their choosing.

A group carve-out plan is a kind of life insurance benefit. It is used to reward certain key employees in a business beyond what is widely available to other employees through the company’s group term life insurance policy. Individuals eligible for a group carve-out plan may gain access to permanent life insurance, which can accumulate cash value over a period of time which can be used to provide a future tax-free income.

A split life insurance plan is not an actual insurance policy. It is a contract used for the purpose of showing how life insurance will be shared among beneficiaries. Split-dollar plans become terminated in one of two ways, either the employee’s death or a specified future date that was previously agreed upon. Any permanent life insurance policy that has the potential to build cash value can be used for a split-dollar plan. They are used in business settings and agreed upon between an employer and a key executive (usually). The agreement defines how they will share premium costs, cash value, and death benefit of the actual life insurance policy. These agreements are also often used to facilitate succession plans and/or buy-sell agreements for business owners.

A Supplemental Executive Retirement Plan (SERP) is a defined set of benefits made available to key executives or other top employees in addition to the company’s standard benefits and retirement plan. A SERP is a type of deferred compensation plan and is a non-qualified plan.

The phrase “Golden Handcuffs” refers to how businesses or corporations will use various forms of compensation to keep key executives or other high-level employees from leaving the Company. Different financial incentives, long-term agreements, and contracts are used to hold down those who have irreplaceable skills or a history of quality performance within a company. These types of plans are also often used to help keep key management in place when a business is being sold. This benefit will also help to increase the value a business owner will receive from their exit.