Why Executive Benefits?
Every player on the team has an important role. Yet, every team has key players. The strength of your organization is based on the value of these key people. What would be the impact to your business if your executives were to leave, or be recruited by a competitor? Whether in sports or business, impact players position your organization to reach its fullest potential.
Qualified Compensation Plans such as Sec. 79 plans and 401k plans (subject to ERISA law), limit how an organization can compensate Key Officers.
1Non-DiscriminationUnder plans governed by ERISA, an Employer may not discriminate in regards to who is offered the Benefit Plan. (all employees, including Rank & File must be included in the program). In contrast- through a “non-qualified” platform, an Employer may be selective as to who is offered the Plan- and the terms for each participant.
2Contributions/BenefitsERISA legislation imposes caps on both contributions and benefit levels regarding qualified plans. Under this legislation, higher-income executives may actually receive significantly less in benefits as a percentage of compensation compared to other employees. In contrast, “Top Hat” Plans allow for plan designs that support the needs of higher-income executives.
3VestingWhen it comes to Executive Pay, utilizing effective vesting schedules helps Employers create the “Golden Handcuffs” needed to incentivize long-term commitment from Key Executives.
ABCs of “Top Hat” Plans
- Nonqualified deferred compensation arrangements, sometimes called “Top-Hat” Plans, are contractual obligations of an Employer to pay an Executive (or Director) compensation in the future for services rendered today.
- This means that the actual liability of the Plan must be accounted for on the institution’s balance sheet. (not in a trust segregated from the institution’s balance sheet)
- Plan Participants are unsecured creditors of the institution.
- These arrangements must be ‘unfunded’ for ERISA purposes, but they are often informally financed from general corporate assets- noted as an “Asset Reserve”.
- The Benefit Plan and the Asset Reserve (if any) must be accounted for separately.
- Eligibility: A Top-Hat group should consist of a select group of management or highly compensated employees. This means that plan participants are, typically, C-Level Executives, EVPs, and/or SVPs. This group should constitute @ the top 5% of the workforce. (depending on the size of the organization).
- Top-Hat Plans must comply with the rules of Internal Revenue Code (IRC) Section 409A that govern NQDC plan deferral elections, distributions, and funding.