KEY FACTS ON NON-QUALIFIED DEFERRED COMPENSATION PLANS
91% of all Fortune 1000 companies provide a Non-Qualified Deferred Compensation Plan to their Key Employees.
The international consulting firm Lockton noted that in Corporate America NQDC plans are furnished to to executives to provide a vehicle to reach their retirement and personal planning goals before their income is subject to taxation. Lockton's study, "How Truly Flexible is A Non-Qualified Deferred Compensation Plan?" is a great primer on NQDP plans.
in small business america
One of the startling statistics is less than 17% of companies with less than 100 employees use a Non-Qualified Deferred Compensation Plan.
That means that the doctor, small business owner or partner in a professional firm who has the same desire to defer (avoid taxes) is not taking advantage of the planning vehicle used by executives in Corporate America.
how are nqdc PLANS
The decision to defer compensation creates an unsecured obligation for the company to pay the monies back to the executive at some point in the future.
That naturally raises the question as to where these monies will be invested and what will be the rate of return on these monies.
The need for a great administrator that can provide state of the art accounting as to the amount deferred and the interest earned on the amounts contributed to a NQDC plan is imperative.
The average NQDC plan will credited returns at 4% to 6% a year. The executive should have online access to a daily updated balance of how much the company owes him.
Question... Where does the company invest the money?
The statistics shows that 60% to 70% of all NQDC plans obligations are invested in Company Owned Life Insurance -- or COLI plans.
This is not however the standard insurance sold on the street. This product is institutionally priced to account for the greater longevity that executives and professionals have vis-a-vis the general population.
More importantly, the policies are specially designed so the least amount of premium goes into the insurance component of the plan and the maximum amount of premium goes into the cash value component.
The focus of course is not insurance. The focus is for monies to accumulate in the 'cash value component' of the plan where it can grow tax-deferred and the company can access the funds tax-free for payments of its NQDC obligation.
Yes, a NQDC plan can be a revenue center whereby the company is able to use a tax-free loan from the policy and take a tax-deduction when the NQDC obligation is paid to the executive. In addition, the company can collect on the policy when the executive passes away.