When companies cater to retirement planning, they do so through a 401(k) plan, sometimes with profit-sharing or matching benefits or without. These plans are quite good for rank-and-file employees, but they greatly limit the corner-office types.
Challenges that Face Business Owners
One, with qualified plans like the 401(k), it limits employees who are highly compensated, from putting away sufficient money to achieve their retirement goals. This is because these employees can only put away an amount that is dependent on what the other employees choose to sock away- mostly 125% of what they contribute, or two %ge points higher. So if an exec wants to save 10% in his plan, he might be limited to 5% since the other employees’ average at 3%.
Two, qualified plans are not that flexible. According to the Employee Retirement Security Act, the plans must include all eligible workers. This, therefore, prevents using these retirement plans as special benefits to their highly valued executives.
Three, qualified plans do not accord the executives the chance to put away sufficient amounts of their pre-tax income. So what option do business owners have? Executive benefit plans.
What are Executive Benefits Plans?
These are non-qualified plans that enable executives to sock away an amount that they find ideal for their retirement and that reflects on their current lifestyle.
With these plans, business owners have a choice on who benefits from them. In fact, they can build a specific plan with an executive in mind. These non-qualified plans are great for tax advantages, for businesses and employees. When the plans are designed, they will have little to no effect on the company’s balance sheet. Better yet, they can improve it over time.
Types of Plans
In a Selective Executive Retirement Plan, the beneficiaries are key personnel and it allows the corporation to give out a percentage of the employee’s pay when they retire over a couple of years, like a pension or an annuity. SERPS can be partly funded by the business. The downside is that they are not portable like in 401(k) plans.
Deferred Compensation Plan
In these plans, key personnel defer their income, and thus their current taxes. Unlike in SERPS, they are not funded by a company as the execs deal with their personal pre-tax dollars.
These plans include benefits like long-term care insurance, life insurance, and disability insurance, depending on the needs of the business and executive.
To come up with an executive benefits plan, you’ll need the assistance of a specialist to help with the plans. They are under section 409(a) of the tax code and thus need the services of an adviser to avoid unexpected taxation or potential penalties.