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 The
one-two punch of a non-qualified deferred compensation plan
used in con- junction with a properly designed PEO 401(k)
plan can knock out any competitor and allow you to capture
the benefits-driven prospective client. Many potential clients
exhibit a clear desire to magnify and maximize their tax preference
savings. A marketing strategy for new client acquisition and
retention for our PEO and administrative employer clients
could offer different types of plans which provide tax benefits.
A key reason for client/owners and highly compensated individuals
to discuss the employee leasing relationship is the availability,
quality, and cost effectiveness of the PEO's retirement plan.
Executive benefits
are hot issues in today's professional employer market place
- if they are not a part of you current marketing, they certainly
should be.
Interestingly, many prospect companies that wish to participate
in executive benefit plans are larger in employee size. In
a recent visit with a PEO representative to a prospective
200-plus employee client, the majority of the meeting involved
a discussion with the owner about additional alternatives
to his 401(k) plan for accumulating wealth.
The sophisticated client knows the effect of inflation.
They realize that retaining buying power in relation to current
dollars is critical to their retirement plan. Assuming 3 percent
inflation, a 45-year-old executive earning $250,000 in current
dollars would need $663,324 in future dollars by age 65 to
retain the same buying power.
A non-qualified deferred compensation plan can interface
with the PEO marketing effort. The types of
Non-qualified, deferred compensation plans
available are ERISA excess plans, SERPs (Supplemental Executive
Retirement Plans), restoration plans for loss of benefits
from past retirement plans [profit sharing plans, 401(k) plans,
defined benefit plan, incentive plans, deferral plans, survivor-benefit
plans, and supplemental - disability income plans.
Non-Qualified ERISA Excess Plan The March 15th deadline
for the return of excess deferrals to your highly compensated
employees (HCE) without penalty has come and gone. Some
HCEs received a refund of excess contributions, causing
many headaches such as late or amended tax returns.
One solution to this problem is to establish a non-qualified
deferred compensation plan which acts as an ERISA excess
plan. This type of plan solves the problem of returning
the excess contributions by allowing the executive to invest
them in an alternative, non-qualified plan. This reduces
or eliminates your client's dissatisfaction with your 401(k)
plan and reduces your March 15th pressure in not having
to return the excess deferrals.
For the HCEs, the deferred compensation plan mirrors the
401(k) plan in functionality, as contributions arc invested
per their investment instructions and are not subject to
income tax in the year deferred. Like their 401(k), the
funds are subject to income tax in the year in which they
are withdrawn from the plan. As in all of your employer
sponsored benefit programs, the PP0 or administrative employer
needs to be considered the employer of record. Here's how
this kind of plan works:
1. You select the employee(s) to whom the plan will be offered.
2. You enter into an agreement with each participant.
3. The company promises to pay deferred compensation benefits
to supplement the participant's retirement income.
4. The employee agrees to defer part of his/her annual income
until retirement, disability, or death.
5. The agreement summarizes the terms of the benefit in
the event of retirement, disability, or death.
6. At the participant's retirement, death, or disability,
the company makes the agreed-upon deferred compensation
payments.
7. All deferred compensation payments are tax-deductible
to the company in the year in which they are paid to the
participant. In exchange for the promises paid by the company,
the participant may be asked to satisfy certain requirements.
For example, they may be required to either remain with
the company for a specified number of years (potentially
until retirement age) or refrain from activity of a competitive
nature upon retirement or leaving the company.
Although the tax deduction for the contribution is deferred
until paid to the participant, it is magnified in size when
actually deducted since both the contribution and the appreciation
are deductible. If the plan is set up so that earnings are
accumulated on a tax deferred or tax free basis, this can
create a tax benefit to the employer. For example, if the
total contribution of $100,000 grows to $200,000 in value,
the employer would receive a tax deduction for $200,000
(twice the original contribution) when the benefit was paid.
Executive benefit plan alternatives create competitive
advantages for your PEO. A competitive advantage contributes
to your success and growth. Non-qualified deferred compensation
plans constitute a competitive advantage by satisfying your
current and potential clients needs and desires for additional
executive benefits.
 David
Core is president of Pinnacle Financial Services. David
W.D. Core is a registered representative of, and securities
offered through, Lincoln Financial Advisors Corp. He can
be reached at 800-375-PLAN (7526).
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