NQDC Plans Aim to Mitigate Risk of Key Employee Early Retirement

July 27, 2021
Hall Benefits Law, LLC

The COVID-19 pandemic has brought about a number of changes to the American workforce, including shifts in how work actually gets done – or doesn’t get done. According to government data, the pandemic has accelerated the rate at which Americans are retiring, with a reported 2.7 million Americans over the age of 55 considering retirement years earlier than they had imagined.

Thanks to soaring stock market and real estate values, older workers who can afford to do so are calling it quits. A recent New York Federal Reserve survey showed that the number of people who plan to work past the age of 67 fell to a record low of 32.9% in March 2021. 

While early retirement can be a boon for more affluent employees, this trend can be potentially crippling for companies that rely on senior executive talent to run their businesses. Corporate boards hoping to stem the loss of key talent to early retirement may wish to consider nonqualified deferred compensation plans (NQDCs) as an incentive to retain top executives.

NQDCs – also known as 409A plans – allow higher income employees to defer ownership of their income, thus avoiding income taxes on earnings while obtaining tax-deferred investment growth. Since NQDCs do not have the same restrictions as retirement plans – such as a cap on contributions like 401(k)s – an executive’s deferred income can be used for financial goals other than retirement. Savings in an NQDC can be deferred for five or 10 years, or until the employee retires.

Companies can also use NQDCs to create ownership opportunities for key executives considered as potential future owners by funding a NQDC plan and setting it to vest and distribute on a change in control. 

Additional benefits of a NQDC over a 401(k) plan are that NQDC participants are not required to start taking withdrawals at age 72 and have the ability to choose a certain date or age for withdrawals.

For more information on how a NQDC plan can help your company retain key employees, contact the ERISA compliance team at HBL.

HBL has experience in all areas of benefits and employment law, offering a comprehensive solution to all your business benefits and HR/employment needs. We help ensure you are in compliance with the complex requirements of ERISA and the IRS code, as well as those laws that impact you and your employees. Together, we reduce your exposure to potential legal or financial penalties. Learn more by calling 678-439-6236.

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Hall Benefits Law, LLC

HBL offers employers comprehensive legal guidance on benefits in mergers and acquisitions, Employee Stock Ownership Plans (ESOPs), executive compensation, health and welfare benefits, healthcare reform, and retirement plans. We counsel a wide spectrum of clients including small, mid-sized, and large companies, 401(k) investment advisors, health insurance brokers, accountants, attorneys, and HR consultants, just to name a few. HBL is passionate about advising clients, and we are dedicated to our mission: to provide comprehensive, personalized, and practical ERISA and benefits legal solutions that exceed client expectations.

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