NQDC Benefits Burnished by Tax Reform

An industry-leading benchmark study of non-qualified deferred compensation (NQDC) plans finds that those plans continue to provide a competitive edge in attracting and retaining key employees – an edge that could be sharpened by tax reform.

That was among the key findings of the Plan Sponsor Council of America’s (PSCA), 2018 NQDC Plan Survey, a follow-up to its 2016 study. The PSCA survey provides insight into common and best practices of deferred compensation plans. The PSCA is part of the American Retirement Association.

The survey found that the most common reason employers offer a NQDC plan is to “have a competitive benefits package” (36.3%), followed by “helping eligible employees accumulate assets” (23.4%). The research suggests many employers consider NQDC plans to be a key component in attracting and retaining top talent. In fact, retaining eligible employees was the top-ranked item as a secondary reason for the programs, cited by 29.8%.

Not only can NQDC plans differentiate the employment value proposition offered to executives, they may prove to be even more valuable following the passage of the Tax Cuts and Jobs Act of 2017 and the federal income tax cap on the deductibility of state and local taxes, which effectively raises the top marginal income tax rate in certain states.

These benefits are increasingly important as executives find their contributions to qualified plans, such as 401(k)s, constrained by contribution limits. Indeed, a “restoration match” was the most common type of employer contribution, provided by 32% of NQDC plans, to fill the gap in employer matching contributions to qualified plans created by tax code limits.

An important component driving plan participation is participant education: Nearly 70% of employers provide specific NQDC plan education to their eligible participants, up from just over half (53%) in 2016. The top two reasons for providing specific education are to increase appreciation for the benefits provided by the plan (35.7%) and to increase participation in the plan (25.0%).

Other key survey findings include:

  • Half of employers allow both employee and employer contributions to the NQDC plan.
  • Availability of immediate full vesting increased 10 percentage points, from 35.7% in 2016 to 45.9% in this year’s survey.

The survey of NQDC plan sponsors – the only independent source of plan benchmarking data on NQDC plans for sponsors and advisors – generated 174 responses from employers who either offer a non-qualified plan now or intend to do so within the next year. The respondents came from a wide variety of industries, included both small and large employers, as well as publicly traded and privately held companies.

The full 2018 Non-Qualified Deferred Compensation (NQDC) Plan Survey is available for purchase at www.psca.org/research.

If you work with NQDC plans – or would like to – you’ll want to be part of the inaugural NAPA Nonqualified Plan Advisor Conference and Bootcamp, where you’ll have an opportunity to explore how providing nonqualified plan designs and services can benefit your practice by bringing in new business, retaining existing business, strengthening relationships with mission-critical key employees and opening doors with Centers-of-Influence, who, in turn, are trusted advisors to a myriad of successful businesses. Learn more about the NAPA Nonqualified Plan Advisor Conference and Bootcamp, Sept. 23–25, in Chicago at http://napanqdcforum.org.

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