Introduction / Problem
The harsh reality is that personal income tax levels for the highly compensated will more than likely be rising. Additionally, some personal income tax deductions will also be reduced or eliminated, making it even more difficult for the highly compensated to properly save for retirement.
Companies that design and administer executive compensation and benefit plans must be sensitive to these new realities and focus even more on providing the most cost effective and efficient plan designs. These plans need to have the least tax impact on the executive today, while maximizing retirement income for the future. At the same time, these plans need to be as cost-neutral to the employer as possible. While this task sounds daunting, Nolan Financial addresses and resolves these types of challenges on a daily basis.
With the impending personal income tax changes and tax deduction modifications on the horizon, we are being asked some important and time-sensitive questions.
- “Is it too late to design and install a nonqualified deferral plan for compensation earned 2013?”
- “Can we defer annual bonus earned for 2013 that is paid in 2014?”
Our answer may surprise you. No, it is not too late to begin a deferral plan in 2013 for 2013 compensation, if certain guidelines are followed.
The regulations pertaining to nonqualified deferred compensation plans are contained within I.R.C §409A of the American Jobs Creation Act of 2004. The §409A regulations address short-term plan rules that were specifically introduced to deal with a company’s desire to begin a deferred compensation plan during a plan year; therefore, a company can implement a plan that allows participants to defer compensation earned in 2013, even though the 2013 plan year has begun. In regards to annual bonus earned in 2013 that will be paid in 2014, under §409A regulations, the employer would have until July 1st of 2013 to receive deferral requests from their deferred compensation participants. Participants may defer some or all of their annual bonus earned in 2013, but not paid until 2014. Regulations allow this since the bonus is not paid until 2014 and it occurs at least 6 months after the deferral election.
For companies that would like to implement a plan that would enable participants to defer compensation earned in 2013 or 2013 annual bonuses that are paid in 2014, we would recommend that they contact Nolan Financial at their earliest convenience. The plan design, legal documentation, necessary board/senior management authority as well as the enrollment and implementation should be completed by May 1st.
This time frame will allow Nolan Financial to provide a quality rollout including onsite and/or electronic enrollment. This would also allow sufficient time for Nolan Financial to prepare custom communication materials and an Administration Manual for clients to use on an ongoing basis.
In the coming years, it is expected that higher personal income taxes will be the norm. We believe this is one reason why nonqualified executive benefit plans will continue to see higher demand. Your company’s ability to recruit and retain high-caliber executive talent may be dependent on offering one of these plans. Outside of qualified plans such as a 401(k), there is no other pre-tax deferral option available to an executive, which would allow the executive to adequately save for retirement.
Planning for a nonqualified executive compensation plan requires a deliberate and carefully devised game plan. Limitations of qualified plans present many challenges to highly compensated executives, most of which can be addressed with nonqualified plans. Nonqualified plans complement qualified plans to serve as comprehensive financial planning vehicles.
As a greater percentage of the American population moves towards retirement, nonqualified plans may become more valuable for retirement planning. Implementing nonqualified plans help empower executives to plan and to save for retirement.
Nolan Financial has designed and implemented nonqualified plans for all types of organizations, including for-profit and non-profit. If you have any questions or interest in regards to designing, funding or administering a nonqualified plan, please contact:
Michael E. Nolan
President and CEO
Email – firstname.lastname@example.org
William A. Craig
S.V.P. Business Development
Email – email@example.com
Registered associates of Nolan Financial are registered representatives of Lincoln Financial Advisors Corp. Securities offered through Lincoln Financial Advisors Corp., a broker/dealer (Member SIPC). Insurance offered through Lincoln affiliates and other fine companies. LFA/Sagemark Consulting, 8219 Leesburg Pike, #200 Vienna, VA 22182Lincoln Financial Advisors does not offer legal or tax advice. CRN 201212-2075489.Any discussion pertaining to taxes in this communication (including attachments) may be part of a promotion or marketing effort. As provided for in government regulations, advice (if any) related to federal taxes that is contained in this communication (including attachments) is not intended or written to be used, and cannot be used, for the purpose of avoiding penalties under the Internal Revenue code. Individuals should seek advice based on their own particular circumstances from an independent tax advisor. Nolan Financial Group is not an affiliate of Lincoln Financial Advisors.