Basic NQDC questions

[wsp]

Does it make sense for a company to offer a NQDC plan to it's "core key" (their term not mine) employees if they are not likely to take full advantage of the 401(k) deferrals? The "core key" employees are those that are in management positions that they hope to use this plan to retain and/or attract.

Plan in question is a Profit Sharing plan that they are modifying to a SH with a match. They anticipate only about 50%-60% participation even with the match. Only 2 of those "core key" employees are true HCE/KEY employees. All the rest fall into NHCE category.

Likely that all of the "core key" will hit the 15k limit but only because of the quarterly bonuses that are provided. Otherwise they would fall short.

I just can't see the benefit of the second plan....but I've no experience in the arena either. Certainly an employer contribution funded plan makes sense but not employee deferral.

Also, am I correct in saying that the distributions are funnelled through payroll? And thus aren't eligible for rollover or anything of that ilk?

Thanks in advance...

[A Shot in the Dark]

WSP: Non Qualified Deferrred Comp. Plans is a very generic term for a lot of different plan designs.

For example, if the employer is looking for a deferred compensation program that will allow the core group to defer more than the 401(k) limit, perhaps a "Top Hat" plan would be a proper plan design. This doesn't seem to be an issue with your group.

If the Employer is looking to fund some form of deferred compensation program on behalf of the core group, there are some amazing plan designs that allow for that to occur.

Many people think of the two negative's of NQDC Plans. The assets (defined differently if the plan is "funded" or "unfunded") of the plan is subject to the creditors of the employer. This leaves participants of NQDC's at risk. And unlike qualified plans, an employer does not get an immediate tax deduction for "contributions" to the NQDC. Deductions are taken when the dollars are distributed to the "Participant".

Our office designs and adminsters quite a few NQDC programs and they all seem to be very customized and individualistic.

We also do a few Stock Appreciation Right Programs, which is a NQDC plan that ties the value of the plan to the value of the employer stock. The idea, of an SAR is the best report card for a management team is the stock value, not gross revenues or profit margins, etc.

Good Luck in your research.

[A Shot in the Dark]

WSP: I forgot to answer your question regarding distributions from a NQDC Plan.

Distributions are not eligible for rollover, because the plan is non-qualified. Distributions are subject to ordinary income tax in the year they are received.

Many NQDC's are written with strict distribution requirements, with some of the requirements in place to limit the tax exposure of the participant in a given year.