We are a mid-size manufacturing company that terminated our old deferred-compensation plan due to the issues that the new tax rule 409(A) imposed. We are now considering a new plan that picks up where our 401(k) plan ends (due to IRS compensation limits) and also allows deferral of compensation. However, we want to keep the plan simple for ease of administration. What do other companies with similar plans allow in terms of percentages of compensation to defer? Also, what are the payout provisions?
Denise Grant (firstname.lastname@example.org )
We established a non-qualified deferred compensation plan in tandem with our 401(k), using our 401(k) administrator and using the same funds as the 401(k) plan. There are two general ways of doing it: funding it and not funding it.
We elected to fund it, sending the funds monthly, as we do in the 401(k) plan, to the investment company. The advantages of doing it this way are the employees have the choice of the same funds as the 401(k) plan and it is simpler to administer. However, you need the cash to fund it.
If you don’t fund it, the company makes accounting entries and pays a composite interest (or investment) rate. Either way, you need a good attorney for the documents and an administrator for the accounting and recordkeeping functions. Also, with the funding option, you need to set up a grantor trust, and a rabbi trust is recommended. The grantor trust is recorded on your company’s financials, according to GAAP regulations, but its income and expenses match to $0, as do the trust assets and liabilities.
We allow a dollar amount or percentage of total compensation (salary and bonus); up to 90 percent of compensation for deferral (it’s the employee’s money, anyway). The company can elect to match $0, or a certain amount or percentage. The payout provisions have to comply with 409(a) anyway. You can’t get away from that.
We use a minimum three-year deferral, and there are also five- and 10-year deferrals. Then the employee can get 100 percent in the third year or spread the payout over the next five years, at 20 percent per year. Or the employee can roll over 100 percent at the end of the third, fifth, or 10th year.
Alberto Vega (Avega@OceanBank.com )