PLANADVISER - March/April 2019 - 48

and/or officers, as defined in the plan document. If not, the
plan could become subject to ERISA requirements.
Of all the plan types, the most popular with sponsors is
the NQDC plan, agrees Scott Holton, a principal at The Todd
Organization, a 60-year-old firm that focuses exclusively
on executive benefits, headquartered in Cleveland. These
allow HCEs to defer, on a pre-tax basis, percentages of salary
above what qualified plans allow-$19,000 this year.
Middleton notes there are no limits on how much may
be contributed to a nonqualified plan, per Internal Revenue
Code (IRC) Section 409A. Plan sponsors may choose to match
contributions to an NQDC plan, as they do in their DC plan,
but they also may choose not to, providing the additional
savings opportunity without needing to commit money.
A restoration plan is most often used to restore dollars
lost for savings due to contribution limits or compensation
limits, or it can be used to restore amounts returned to executives
due to failed nondiscrimination testing, Holton says.
For governmental and tax-exempt nonprofit organizations,
nonqualified plans work differently. Penland explains
that IRC Section 457(b) plans may be used as nonqualified
plans; they look like 403(b) plans, with the same deferral
and catch-up contribution limits, but these limits are in
addition to what can be saved in a 403(b) or other DC plan.
As with other nonqualified plans, the assets are subject to
creditors if the sponsor goes bankrupt or becomes insolvent.
In addition, 457(f) plans have been used by tax-exempt
nonprofit organizations as nonqualified plans for HCEs.
However, says Penland, the substantial risk of forfeiture
rule under Section 409A may discourage executive deferrals
into this type of plan. Substantial risk of forfeiture is
the standard that the regulations apply to determine when
an employee's deferred compensation vests and, therefore,
may be includable in income for the individual or deductible
for the employer. He says both for-profit and nonprofit
nonqualified plans are subject to this rule.
Yet, with nonprofit plans, IRC Section 83 says executives
have a legal, binding right to the compensation provided by
the 457(f) whether they defer into it or not; there would have
to be a rigorous vesting schedule for HCEs to defer their own
money and not have to recognize it as taxable income until
it is vested-meaning they could lose their money if the
sponsor went bankrupt or became insolvent. In fact, Voya
has no clients whose HCEs currently defer into 457(f) plans.
" All we're seeing now in the 457(f) market is company contributions
going into plans with a vesting schedule. As money
vests, it is paid to the executive as compensation, " he says.
Penland says nonprofits have gotten creative with aftertax
programs. He says these programs are paired with a
457(f); the sponsor makes contributions for HCEs, subject to
a vesting schedule, and, when the money vests, participants
have a choice to take the money or put it into an institutionally
priced insurance contract. The type of insurance
contract used produces a life insurance benefit, but also a
tax-deferred growth account. Participants may take a distribution
of their basis-what they put into the program-taxfree
or they may borrow from the life insurance, tax-free.
Penland says nonqualified plans are a great supplement
to qualified plans for many reasons, but, for one, they make
a smart distribution strategy. An HCE may be able to take
Social Security at age 62, but if he waits until 70, he will
get a bigger benefit. To fill the gap of time, the executive
may take distributions from his nonqualified plan-he has
an incentive to use this money soon, as it would be subject
to company creditors.
Stock options, restricted stock and restricted stock units,
stock appreciation rights, phantom stock, and employee
stock purchase plans are other ways companies can help
executives and HCEs accumulate more for retirement. These
plans may also provide assets to be used to fill a time gap
between when the person retires and takes Social Security.
The Benefits to Advisers
Middleton says most plan sponsors appreciate options for
how to allocate benefit dollars. Providing them with the
most flexibility permitted to allot that money between
HCEs and non-HCEs helps them reach the goals for their
retirement benefits.
Foster, like Penland, says advisers need to support retirement
benefits for all of a client's workers. Getting into the
service of more plan types also increases potential compensation.
But even if they focus on only one of a sponsor's
plans, it helps if they understand the sponsor's entire retirement
program and how the plans fit together.
Penland says, if an adviser has not become familiar with
all of the ways HCEs can save more, he is making a mistake.
For advisers wanting to get into the nonqualified plan business,
he suggests, " The best way to learn about [these plans]
is to be active in one. Partner with someone who has done
[one] in the past. Go to conferences and get the basics, then
bring in experts to help with the first couple of programs. "
First, advisers should be willing to accept the added
complexity of these plans, translating that into simple explanations
for their clients. He says IRC Section 409A provisions
have become even more complex in recent years; it is now
required that distributions be established before contributions
are made. " Advisers need to know such things before
trying to win clients and expand their business, " he says.
Most nonqualified plan providers offer education and
products to help an adviser understand and explain these
plans, says Foster. " We want to supply all of the necessary
tools to help advisers serve sponsors. " -Rebecca Moore
KEY TAKEAWAYS
* Advisers should first focus on educating plan
sponsors about plan types or designs with which
HCEs can maximize qualified plan contributions, as
nonqualified plan assets can be claimed by creditors.
* There are many types of nonqualified plans-which
have no statutory limit on how much can be
contributed-so advisers should consider which is
the best fit for a plan sponsor client and whether
the client wants to contribute to a nonqualified plan.
48 | planadviser.com March-April 2019
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