FAQs

A 401(k) is capped, and the cap bites hardest at the top. Once someone’s pay rises far enough, the share of income the plan can replace in retirement falls well below what it replaces for everyone else — not because the plan is failing, but because it was designed with limits. Nonqualified plans exist to address that gap for named people. How large the gap is depends on pay, age and how long you need someone to stay.

The difference comes down to protection versus flexibility. A qualified plan — a 401(k), profit sharing or pension plan — follows the full ERISA and tax code rules: contributions are capped, the plan must cover a broad group of employees and pass nondiscrimination testing, and the money sits in a trust for the employees, out of reach of the company’s creditors. The company deducts contributions when it makes them, and employees pay tax when they take the money out.

A nonqualified plan trades those protections for flexibility. It can be offered to the people you choose, in the amounts you choose, without the qualified limits. But the benefit is a promise from the company rather than money set aside in the executive’s name, so the executive stands as a general creditor if the company fails — whether it liquidates in a Chapter 7 bankruptcy or reorganizes under Chapter 11, and even if the company has set assets aside in a rabbi trust. The tax timing shifts too: the executive is taxed when the benefit is paid, and the company takes its deduction at that same time. Deferrals and payments must also follow the rules of Section 409A.

The number of employees that remain with a single company for their lifetime is almost non-existent today and the costs to train new employees, or replace profitable ones is continuing to increase. As such, many employers are trying to find a way to keep their key employees, and have the most flexibility in doing so.

Three things, broadly. It can be offered to specific individuals rather than a whole class. It is not bound by the qualified contribution limits. And the vesting schedule can be written around a business objective — a sale, a succession, a date you need someone to still be there. The cost of that flexibility is that the benefit is a contractual promise rather than a protected account.

A SERP is a defined benefit the company promises to pay. Phantom stock pays out the growth in company value in cash, without issuing a share. A REBA gives the executive something they own, with a restriction that keeps it out of reach until earned. A 401(k) mirror lets the executive defer their own pay above the qualified limits. They differ mainly in who funds it, who owns the asset, and whether the executive shares in company value.

In practice it comes down to four questions: who pays — the company or the executive; who owns the asset; how long you need the person to stay; and whether you are willing to let them share in what the company becomes worth. Answering those usually eliminates most of the options. Our Retention Plan Finder walks through a version of this in about six questions.

No. These plans are not for the rank and file employee and the employer must identify and offer these plans only to owners, management or highly compensated employees.

That is the usual reason companies look at phantom stock. It ties a cash payment to the increase in company value, so the executive participates in growth without becoming a shareholder, without a vote, and without complicating a future sale. What it does not do is give them the tax treatment of real equity.

It means no money has been set aside in the executive’s name. The company has made a promise, and the executive stands as a general creditor if the company fails. This is not a design flaw — it is the condition that keeps the benefit from being taxed to the executive today. A structure that genuinely secures the money tends to trigger current taxation.

A rabbi trust holds assets earmarked for the plan, outside the reach of a later change of management or change of heart. What it generally does not do is protect the executive from the company’s creditors in an insolvency — and that limitation is precisely what preserves the tax deferral. It answers “will they still honour this in ten years”, not “what if the company fails”.

Two broad approaches. Pay the benefit from cash flow when it comes due, and take the deduction then. Or set aside an asset now whose growth is intended to offset the cost — often corporate-owned life insurance, or bank-owned life insurance for a financial institution. The second approach does not change the promise to the executive; it changes how the company carries the cost.

The liability for the promised benefit is generally accrued over the service period rather than recognised when it is paid, so the expense appears long before the cash leaves. If the plan is financed with company-owned life insurance, that asset and its growth sit on the other side of the balance sheet. How the two offset in any given year is specific to the design and should be reviewed with your accountants.

Generally the executive is taxed when the benefit is actually or constructively received, and the employer takes its deduction in that same year — not when the liability is accrued. That timing mismatch is a normal feature of these arrangements and is worth modelling before you commit, because it shapes the real after-tax cost.

IRC Section 409A governs when the election to defer is made, when the money may be paid, and how narrowly the payment triggers must be defined. It matters because the consequences of getting it wrong generally fall on the executive rather than the company — accelerated income plus additional tax and interest. It is the main reason these documents are drafted by counsel rather than assembled from a template.

For a plan covering a select group of management or highly compensated employees, there is generally a one-time top-hat statement filed with the Department of Labor shortly after the plan is adopted. It is short. Missing it is a common and avoidable problem, and confirming it was filed is worth doing on any plan you inherited.

That depends entirely on the vesting language, and that language is the whole point. Until the benefit vests it is generally subject to a substantial risk of forfeiture — which is what makes it a retention tool rather than a bonus. Whether a resignation, a termination for cause, or a sale of the company triggers or forfeits payment is a drafting decision made up front.

No, and the differences matter. Tax-exempt employers work under 457(b) and 457(f), where vesting and taxation behave differently from a corporate plan, and there is an excise tax to consider on the highest-paid employees. A design borrowed from a for-profit company usually will not survive contact with those rules.

Yes. Banks and credit unions operate under supervisory guidance for bank-owned life insurance, including pre-purchase analysis, ongoing risk assessment and documentation examiners will expect to see. The plan design questions are similar; the diligence and record-keeping expectations are not. Our BOLI FAQs walk through the bank-specific questions in detail.

For a straightforward design, typically a few months from first conversation to signed documents — the work is in agreeing the objective, drafting, and any underwriting if the plan is financed with insurance. Plans tied to a transaction or a succession date tend to take longer, because the trigger language has to be right.