Much like a 401(k) plan, Non-Qualified Deferred Compensation Plans, also called “Non-Qual” plans, can serve as a powerful tool for key employees to save for future needs. However they, can be more restrictive and complex to administer than 401(k) plans.
One of the biggest differences is that typically the assets of these plans are irrevocable, having been placed in a trust in which Non-Qual plans are established. Unlike 401(k) plans that have the flexibility to periodically restate plan documents, the governance structures for Non-Qual plans must be put in place when the plan is established—including putting in place a process to amend the trust documents.
That is why it is imperative to build flexibility into a plan and trust from the onset, so that the plan can meet the needs of the organization and its participants today, while adjusting to the changing business demands and participant needs in the future.
Five ways to “future proof” a Non-Qual plan
While trust documents require a certain level of specificity, Non-Qual trust documents should also include mechanisms to empower trust administrators to make key decisions as well as build in clear and straight- forward amendment procedures. This can help the plan maintain the flexibility it needs, while maintaining the security and oversight that participants are looking for.
1. Consider maintaining a flexible mandate funding and investing processes.
Business needs and cash flows change over time. When Non-Qual plans were first established, they were often funded with cash from normal business operations. Over time, companies looked for other ways to informally fund benefits, including by using shares of company stock. And some plans have looked to corporate owned life insurance policies (COLI) as a tax-advantaged way to fund their plans. A flexible trust document can help a plan accommodate changes to funding, vesting and investment activities so that they always align with current business needs.
2. Try to take into account a wide range of participant income goals.
While many participants look to their Non-Qual plan as a way to save for retirement, not all participants share the same future income goals. Some participants may want to wait and use their plan to generate dependable income over a period of time. Others may want to use their plan benefit in a lump sum before retirement to fund a large expense, such as college funding or a down payment on a home. Distribution policies need to be built to accommodate a range of participant demands— some of which may be unique to the individual participant’s needs and larger financial strategy.
3. Don’t trap assets in the plan.
While participants want certainty that their promised benefits will be paid out, companies don’t want to take steps that may lead to overfunding a plan and trapping assets. Trust documents should allow for adjustments to assets if a plan is over-funded and give companies the freedom to withdraw assets over certain thresholds, so long as the action does not negatively impact participant benefits.
4. Establish rules for amending a plan.
Corporate priorities change and if a company is bought or merges with another firm, significant changes in compensation policies may occur. Having viable mechanisms to amend the trust provisions that aren’t onerous or inflexible to use can help protect the participants and the company’s interests. These clauses can also be used to put in place rules on what happens to a plan when there is a change in control.
5. Plan for regulatory change.
While significant changes to the rules governing Non-Qual plans are infrequent, the regulatory environment is not fixed. Legislative changes to the tax code, as well as regulatory change from the Internal Revenue Service, Department of Labor, or other governmental agencies is inevitable.
By maintaining flexibility in how the plans and trust are structured at the onset, organizations can be more confident that the plan will stand the test of time and adapt to changing needs of the business and its employees.
Broadridge can help
Broadridge works with a wide range of Recordkeepers, Consultants, Advisors and Plan Sponsors alike, offering guidance and support for Non-Qual plans. With more than 25 years of specialized experience, Broadridge's Retirement and Workplace Solutions provides comprehensive independent directed and discretionary trustee solutions, custody and trading, and paying agent services—all designed to complement the services of our clients and our partners.
To learn more, contact our team, using the form below.