The big drawback for the employee is the lack of
security with a nonqualified plan. Your company cannot set up an account in
the name of the participant since the IRS would consider that to be currently taxable
compensation. Therefore, a nonqualified pension plan represents nothing more than
the company's promise to pay an employee benefits in the future.
Even if the funds
are deposited into a separate bank account, they are always at risk in the event of
bankruptcy or a change in management. Many companies use life insurance policies and
"rabbi" trusts to fund their plans.
Is a nonqualified pension right for your company?
It very well may be if your company has several employees who earn in excess of the
$210,000 salary cap (in 2005) established for the calculation of pension benefits or if you do not
want the hassle of a qualified retirement plan, but still want to recruit and retain top
executives.
Keep in mind that the tax benefits of a
nonqualified plan are limited. You will not be able to deduct contributions to the
plan until benefits are actually paid to the employee. Please give us a
call if you would like to explore the possibility of establishing a nonqualified pension
plan. Each situation is typically unique and we can assist you in examining your
options.
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