The Top 10 Reasons Why Non-Qualified Deferred Compensation Plans Are Popular
Many breathed a sigh of relief when the Tax Cuts and Jobs Act ultimately removed a provision that would have placed significant restrictions on nonqualified deferred compensation plans (NQDCPs) to the point of effectively eliminating their tax-advantaged benefits. After all, NQDCPs have long been known to add value by serving as an effective retention tool, making up for qualified plan restrictions, and rewarding outstanding
performance that contributes to companies’ and executives’ bottom lines. With traditional pensions and defined benefit plans waning in prevalence year after year, the appeal of company-sponsored vehicles that offer enhanced deferral opportunities remains strong in 2018, according to the results of the Prudential-PLANSPONSOR annual executive benefits survey, now in its twelfth year. In fact, the rate of companies offering NQDCPs continues to rise. Ninety-three percent of survey respondents affirmed their enduring popularity, up from last year’s 85% and the previous year’s 77%, and here are the top 10 reasons why:
No Statutory Contribution Limits.
Plan participants potentially can defer up 100% of their compensation on a pre-tax basis; there are statutory limits to 401(k) plan contributions ($18,500 for 2018; $24,500 for those age 50 and older).
All contributions to these plans and any earnings thereon generally are not subject to income taxes until distributed.
Help Reduce the Impact of High Tax Rates.
Deferrals reduce participants’ taxable income, which can help them avoid top tax rates on ordinary income, capital gains and dividends, and Medicare tax. The ability to choose/change the timing and method of future distribution payments to assist with tax planning is another benefit.
Flexible Payout Options.
NQDCP participants do not have to wait until retirement or termination of employment to take money out of these plans. Penalty-free withdrawals are generally available while employed or after termination; the participant does not have to be age 591/2, as with a 401(k) plan.
NQDCPs can offer participants investment crediting options that are similar to 401(k) plans; in addition, most plans allow participants to select different investment allocations by plan year, which can correspond to the distribution dates.
Help Close the Retirement Savings Gap.
At higher income levels, qualified tax-advantaged deferral opportunities and Social Security benefits are limited. An NQDCP can help its participants plan for specific financial goals by serving as an additional source of income in retirement.
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