As a result of these limits, highly compensated
executives (those earning more than $90,000 for 2003) at many small businesses are finding it
increasingly difficult to make significant contributions to their company's 401K
plan.
Many companies are responding by setting up nonqualified plans that are not
subject to government control.
Of course, the plans also are not tax-deductible,
but they can be set up any way the employer wants and can cover as few employees as
desired. (ERISA actually prohibits a nonqualified plan from covering all
employees). They can be used as recruiting tools, incentive plans or profit sharing
plans.
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
$200,000 salary cap (in 2003) 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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