Copyright ©2004 Wall Street Instructors, Inc. All rights reserved. No portion of this publication may be reproduced, stored in a retrieval system, or transmitted in any form by any means electronic, mechanical, photocopying, recording or otherwise without prior written permission of Wall Street Instructors, Inc.
Introduction to Nonqualified Plans
The important points addressed in this lesson are:
The name "nonqualified plan" may suggest to the financial practitioner and to the business owner that it is somehow not as good as a "qualified plan"; nothing could be further from the truth
A nonqualified plan is good or bad only insofar as it accomplishes or fails to accomplish the business objective
Nonqualified plans enable businesses to tailor plans around the needs of the business and its key executives
Nonqualified plans may permit the business to recover some or all of the costs of providing the plan benefits
Unlike contributions to qualified plans, contributions to nonqualified plans are not income tax deductible
Nonqualified plans are generally most attractive to businesses in which owners play a part in the day-to-day management
Business needs that may be met through a nonqualified plan include attracting, retaining and rewarding key executives
Salary continuation plans are often referred to as "golden handcuffs" because of their ability to retain key executives
A qualified plan is one that, by meeting certain non-discrimination and other requirements, qualifies for a tax deduction for contributions
The major types of nonqualified plans are split dollar, deferred compensation, executive bonus and group carve out plans
Deferred compensation plans fall into two categories: true deferral plans and salary continuation plans
A split dollar plan is one in which a person with financial resources helps another person with a need to purchase life insurance
An executive bonus plan is the simplest of nonqualified plans and is one under which an employer agrees to pay premiums on a life insurance policy owned by an executive
In a group carve out plan, an employer replaces group life insurance in excess of $50,000 with individual universal life insurance policies and pays a premium equal to the premium for the replaced excess group life insurance
The most effective method of marketing nonqualified plans is through target marketing
Target marketing involves the identification and selection of markets for penetration that meet certain criteria and are appropriate for the agent
To the uninitiated, a nonqualified plan seems clearly inferior to a qualified plan. After all, if it were as good as a qualified plan, wouldn't it also be "qualified"? Perhaps one of the first things that should be done in order to give nonqualified plans the respect which they are due and their rightful place in employee benefit planning is to change their name to something else¼almost anything else.
The question about whether a qualified plan is superior to a nonqualified plan is as inane as the question about how much life insurance an individual should have. To both questions the answer is the same: it depends. In the case of employee benefit plans, the right answer to the question depends upon what the business is trying to accomplish through its plan. In many cases, the business should consider a qualified plan; in many other cases, however, a nonqualified plan may be the only reasonable choice.
This course will examine the four principal nonqualified benefit plans, and it will discuss how they work to accomplish the business owner's objectives. As you read the material that follows, it is important to remember that a nonqualified plan is good or bad only insofar as it furthers -- - or fails to further -- the business owner's objectives in establishing it.