Non-qualified plans are primarily available to highly compensated employees to provide them an opportunity to defer more income for retirement, above the IRS limits. There are many decisions that have to be made at enrollment: How much to defer from base or bonus, when to schedule a distribution, which investments to choose, etc.—and enrollment occurs annually with some elections that cannot be changed until the next enrollment period. What’s more, this type of plan can have many differences or nuances from company to company.
How can you help employees understand and recognize the benefits of a non-qualified plan at your company?
Personal enrollment consultations by a retirement specialist can increase the benefit perception, thus the success of your non-qualified plan. During a personalized consultation, the retirement specialist should:
1. Highlight the plan details including a quick review of 401(k) plan IRS limits.
2. Ask questions to identify participation goal:
- Is the employee’s goal to maximize the company match or save a percentage of base pay and/or bonus to have enough for retirement?
- Asking questions with possible reasons for pursuing a non-qualified plan helps the employee to identify a reason to participate.
3. Review deferral election options:
- Consider if deferral includes base pay and bonus, or if there is a separate election for bonuses.
- The consultant should be able to quote current base pay plus any projected target bonus, thus providing a recommended deferral percentage to meet the participant’s savings goal.
4. Highlight the investment options. Note that this review can be time-consuming, especially if the options are different from the company 401(k) plan. If they have available time, complete the recordkeeper’s investor profile quiz to get a suggested asset allocation.
5. Explain distribution options. Distribution timing is crucial for tax purposes since these non-qualified account cannot be rolled over to an IRA or other retirement plan. The distribution election tends to be the most challenging decision for participants, so be sure and highlight the rules for changing the distribution timing according to IRS Code Section 409A regulations:
- The change must be submitted at least one year before the scheduled date of a lump sum or first installment. If a payment is scheduled to be made upon separation from service, the election change will not apply if the separation occurs within one year after submitting the change.
- The distribution must be delayed by at least five years from the original payment date. An earlier payment date cannot be chosen.
- No changes can be made once a distribution is in pay status.
Depending on the plan document there may be an opportunity to have more than one distribution election. This is a good time to explain that 409A benefits don’t have the same level of benefit security as do qualified ERISA plans. If the NQP is funded in a rabbi trust, that trust is still part of the company’s general assets, meaning they would be subject to creditors’ claims in a corporate bankruptcy.
6. Gather beneficiary information or explain how to enter the information on the plan website.
Recently, Milliman consultants conducted personalized NQP enrollment consultations for a client. Below are a couple of responses from its executives:
“My meeting was great. She helped me understand my options and what I needed to do moving forward to be prepared. She is very knowledgeable!”
“The representative offered objective feedback that was not biased toward any particular action plan. She answered all of my questions about the differences between my 401(k) plan and a non-qualified plan. We discussed several options for me to personally address. Very helpful!”
It all goes to show how a simple meeting that lays out the basics of your company’s non-qualified plan may go a long way in helping to increase its benefit among executives and other key employees.