In today's highly competitive business environment, one of the key elements of a company's ongoing success is its ability to retain and adequately reward key personnel. But when it comes to providing qualified fringe benefits, including profit-sharing and pension plans, there are many federal regulations that prevent an employer from discriminating in favor of a particular employee or class of employees. Yet many employers have a small group of employees who are indispensable to the success of the business. Nonqualified plans allow employers to target compensation to those most responsible for the company's continued viability.
In recent years, for various reasons, Congress has tightened regulations concerning qualified plans. These changes in the law provide for tougher nondiscrimination rules and more stringent vesting provisions — making qualified plans more expensive both in meeting new actuarial requirements and coping with increased administrative costs. Caps on salaries for the purposes of computing qualified plan benefits have had adverse effects on providing retirement income for highly compensated employees. As a result , the popularity of nonqualified deferred compensation plans has grown considerably in recent years as federal regulation of qualified plans has become more complex and more restrictive.
For these reasons, employers are turning more and more to nonqualified deferred compensation plans to provide logical solutions for executive compensation concerns. Among these plans are top hat plans, SERPs and excess benefit plans.
These will be discussed later in this Module.
Upon completion of this Module, you should have a basic understanding of:
the reasons for using nonqualified deferred compensation;
the types of deferred compensation plans commonly used;
the elements of a deferred compensation plan;
federal tax rules governing deferred compensation plans; and
special issues important for majority shareholders of the firm.