PLANADVISER - November/December 2019 - 38

regulatory radar
NQDC Guidance
N
onqualified deferred compensation (NQDC) plans
are an important way to help highly paid employees
save more annually for retirement than is permitted
in a qualified retirement plan. NQDCs can also help
employers meet other goals-e.g., serving as a key incentive
in recruiting and retaining top talent and as a vehicle
for providing performance-based rewards.
Despite the clear distinction in the names, plan sponsors
often mistakenly believe that NQDCs operate like qualified
retirement plans, says Kathleen Souhrada, vice president
of nonqualified and life administration at Principal Financial
Group in Des Moines, Iowa. This highlights the value a
skilled and educated plan adviser can provide, she says.
An NQDC plan is exempt from the provisions of the
(ERISA)
Employee Retirement
Income Security Act
that
govern qualified retirement plans, says Phillip L. Currie
Jr., managing director of Fulcrum Partners in Newport
Beach, California. Plan sponsors do set up the plan document
to define the provisions of the plan, but the only filing
requirement is that the plan sponsor must notify the DOL,
by letter, of the plan's establishement within 120 days of
that event. " There are no Form 5500s, " Currie says, " and
the plans don't have to be funded-there doesn't have to be
a trust associated with them. "
Advisers can help clients navigate the complexity of these supplemental plans
Funding
NQDC plans are, in actuality, a " promise to pay, " Currie
says. If a sponsor chooses to fund the NQDC liability, best
practice would be to allow participants to self-direct their
account balance within a menu of investment options,
which are notional. The employer then purchases assets
that mirror the participants' notional
investments to
hedge the liability. Unlike with a 401(k), which is an ERISA
plan, NQDC plans do not require establishing a trust to
hold their assets; doing so is optional. If the sponsor wants
to increase the benefit security for participants, it would
not only fund the liability but would hold the assets in a
rabbi trust-a type of grantor trust.
Typically, NQDC plan sponsors purchase corporateowned
mutual funds or corporation-owned life insurance
(COLI) to fund their plan, Souhrada notes. Whatever their
method, sponsors commonly fail to understand that benefits
payable under an NQDC plan are a liability on their balance
sheet, she says. And if they informally finance their NQDC
plan by purchasing some kind of asset, this asset needs to
be recorded on their balance sheet, as well.
" Because NQDC plans are unfunded obligations, participants
have a substantial risk of forfeiture should any type
of insolvency event occur to the plan sponsor prior to bene38
| planadviser.com November-December 2019
Art by Franco Zacharzewski
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PLANADVISER - November/December 2019

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