Now more than ever, people are the most important asset you may have to the survival or the continuing success of a business. As such, you need to do, or offer, anything that you can that will attract and retain the best. If you need additional incentives for highly compensated employees, read on...

While some financial advisors like to flag non-qualified deferred compensation plans (NQDC) as troublesome and potentially litigious, the fact of the matter remains that NQDC Plans are more popular now than at almost any time. The reason? NQDC's are flexible plans that promise to pay money for participants at a specified time in the future, while allowing a current deferral of income. Tax law changes, which have made traditional alternatives to NQDC (such as qualified pension or profit-sharing plans) more expensive, restrictive, and troublesome, have made NQDC more attractive to employers. In addition, an NQDC Plan is highly flexible and places almost total plan design control in the employer's hands. The employer has essentially arbitrary power to pick and choose who will be covered, what benefit levels will be provided, and under what terms and conditions. And, the employer is free to create different plans for different individuals.

The instruments that may be used for the funds are varied, and can be as diverse as, say, a group fixed annuity in a Supplemental Employee Retirement Plan, or an ERISA Excess plan, survivor benefit plans, disability income plans, life insurance - numerous options are available.

Use NQDC Plans when you wish to recruit, retain, and retire key personnel:

• Reward key employees without giving them a direct equity interest. NQDC can serve as a substitute for equity-based compensation packages such as company stock or stock options.
• Create tax-leveraged financial security for key employees. Corporate tax deductions can be used to leverage future benefits the employee will receive because the corporation will be entitled to an income tax deduction; the corporation saves in taxes, thereby enhancing the money paid out, reducing the employer's real cost, and achieving maximum objectives.
• Provide supplementary benefits to an individual who is already receiving the maximum benefits or contributions allowable to highly compensated persons under Code Section 415 and who is blocked from receiving the same proportion of compensation the rank-and-file employees will be entitled to under the company's qualified plan. NQDC Plans can be designed to make up the difference and therefore minimize or eliminate the tax law discrimination against higher paid individuals.
• Provide benefits in lieu of, or as a supplement to, a qualified pension plan. This may be a case where the employer wants to avoid the cost and administrative problems of a qualified plan, or wants to avoid the cost and complexity of covering all of the employees that otherwise would have to be covered with a qualified plan.

Life insurance is commonly used as the 'vehicle of choice' to provide the source of funds to meet employer obligations under a NQDC plan. It can be used in many ways, much like other assets set aside to finance a plan. Under current tax law, life insurance has several advantages, such as tax-deferred buildup of cash values and the availability of substantial income-tax free death benefits even in early years of the plan. Because of the particular advantage of life insurance, many NQDC plans are designed specifically to make use of life insurance financing.

To finance a NQDC plan, a corporation or employer generally purchases, owns, pays premiums on, and is the beneficiary on each covered employee's life. Unlike group term contracts, employees participating in a NQDC plan are not subject to current income taxation on the current life insurance coverage. Policy cash values can be used to help an employer pay promised plan benefits, or, alternatively, the employer can choose to hold the policy until the covered employee dies. If the employee dies before normal retirement age, the proceeds from the policy can be used to finance the agreed-upon payments to the decedents heirs.

NOTE: Under newly written legislation, commonly referred to as 'Enron laws', ANY NQDC plan should be reviewed by legal counsel before implementation. While life insurance remains, for the most part, the easist and most popular funding mechanism, new regulations make all NQDC arrangements, whether dealing with options, compensation alternatives, or traditional life insurance or annuity arrangements, much more problematic and difficult.

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