They can be great for rank and file employees, but the low contribution limits do little to excite owners or key executives. Whether using non-qualified executive compensation plans as a retention/recruiting tool (“golden handcuff” plans) or simply to properly reward performance of owners and certain key people, these plans can be specifically tailored for each individual. Although the tax treatment will vary by the type of plan chosen, non-qualified executive compensation plans often avoid the common shackles of qualified retirement plans: discrimination testing, low contribution limits, and pre-retirement withdrawal penalties.
Non-qualified executive compensation plans should go hand in hand with business succession planning. In the case of a sale to a third party, they may ensure continuity of management. For inside sales to key employees or transfers to family members, a properly designed non-qualified plan can be absolutely integral when trying to reduce the total amount of taxes triggered by the eventual disposition of the business.
It is paramount that you have an advisor fluent with both the complexities of non-qualified plans as well as the nuances of exit planning. That way the two can be properly married together creating the most powerful result for owners and heirs.
