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What’s Behind the Low Participation of Nonqualified Deferred Compensation Plans?

My Financial Coach > Know-More Blog > What’s Behind the Low Participation of Nonqualified Deferred Compensation Plans?

The overall rate of companies offering nonqualified deferred compensation plans (NQDCs) increased to 85 percent in 2017 from a survey low of 77.2 percent in 2015, according to the annual Prudential/PLANSPONSOR Executives Benefits Survey.

Average participation rates were relatively flat at 47 percent. So, how does this affect you?

Plan sponsors believe the most important factor in the decision of eligible employees to participate or not in NQDC plans is education and communication. Two other factors rank second and third: limitations on or lack of other pre-tax deferral opportunities and confidence in company performance.

Participation rates at 60 percent were notably higher in plans offering matching contributions, while plans not offering a company contribution had an average participation rate of only 37 percent.

A notable 21 percent of respondents plan to offer or enhance the company match—a key incentive for plan participation, as noted in year-over-year survey results—or add deferral sources, which would provide plan participants with additional opportunities to meet financial planning goals and reduce taxable income.

Further analysis of the survey reveals that company-match prevalence remained flat overall (46.8%) and, as in prior years, was more commonly offered at larger organizations (49.6%) and public companies (64.0%).

The 401(k)-match formula for compensation above IRS annual limits once again listed as the most prevalent type of company match among survey respondents (45.6%), a percent deferral match (40.5%), as well as one to replace a lost 401(k) match (36.7%) registered a close second and third.

Flexible options for scheduling and receiving plan payments differentiate nonqualified plans, representing a clear benefit. Indeed, the vast majority of plan sponsors offer their eligible participants a range of distribution election choices permitted under IRS Code Section 409A.

As in previous years, separation from service the most common distribution election offered by survey respondents (96.4%), followed by death (80.5%) and scheduled in-service (65.6%).

Having an opportunity to tax defer income, especially when in high-income tax states, seems like a no brainer. In California, when you look at state and federal rates, you save 50 percent.

So why are participation levels so low?

Even with a company match, only 46.8 percent participate.

What’s wrong here?

Don Curristan, Managing Director of Executive Benefit Solution, a Boston-based executive benefit consulting firm, says:

“Communication and education is the main factor. When we see low participation levels, we use our online survey tool to get to the heart of the reason. In 90% of the cases, the main reason is employees don’t understand the plan. One of our questions asks non-participants to rank the features they want in an ideal plan. Most chose features already in their employer’s plan.”


Most employers offer their executives a comprehensive total rewards system from base salary and annual bonuses to long-term incentives and equity awards. And here is where the situation becomes more complicated. The chart illustrates what’s at stake.

Executives Compensation and executives benefits core strategy

All those elements on the left side of the chart above, and the core benefits along the bottom, are taxable income at some point. To steadily grow wealth, the executive can take advantage of employer-sponsored plans (on the right) like the NQDC plan.

Let me give you an example. In many situations, employers issue executives equity awards in the form of restricted stock units (RSUs). RSUs carry one downside: the executive must pay income tax on the stock grant, valued at fair market value. Typically, executives are taxed upon vesting at the fair market value of the stock at the time.  For example:

An executive is granted 4,000 shares at a current price of $20 (see chart below). The company maintains a four-year vesting schedule (25% per year). Assuming the stock grows from $20 ($20, $25, $30, $33), the executive will have $108,000 of taxable income when he vests over the four years (must pay tax at the time of vesting).

In a 40 percent tax bracket (federal and state), the executive incurs out-of-pocket costs of $43,200.

In our experience, the executive normally would sell enough shares to cover his/her taxes, resulting in the requirement to sell 400 shares per year to cover taxes.


Sample Restricted Stock & RSU for executives benefits

To take advantage of the deferral feature, the executive must hold the shares (units) in the deferred compensation plan, and the company must pay the executive with shares at distribution. You can learn the details of this arrangement in a blogpost authored by Executive Benefit Solutions entitled: “Restricted Stock Units in a Nonqualified Deferred Compensation PlanAn Effective Tax Planning Tool for Future Financial Needs.”

By deferring, the executive can elect to spread out the distribution with consequent taxes. Refer back a moment to our example above. When the executive vests in the first four years, he is not paying income taxes; thus, at the end of four years, he holds the 4,000 shares with a value of $193,600 ($33 per share). If he takes a distribution in two years following vesting, the value is worth $200,000 ($50 per share), based on hypothetical projections.

To compare the examples, glance over this information:

tax implementation for stocks option as an executives benefit


Even though we have a slight advantage, the deeper benefit materializes with spreading the payments over time. In fact, if we spread the payments over ten years or longer and take up residency in a state with a lower or no income tax, we can avoid paying state income tax in the state we receive the RSUs (see earlier linked post).

For instance, an executive living in California who retires and resides in Nevada, Texas, Florida, Tennessee, New Hampshire, Washington, Wyoming or South Dakota can save up to 13 percent in state income taxes.

Naturally, executives are concerned with the investment risk of holding a single company stock for a long time. Most financial planners would recommend diversification. However, the account rules until now would not allow that to happen without a charge to corporate earnings.


The ability to differ stock awards AND diversify shines as the true advantage, one impossible to achieve before now.

Defer RSUs and Diversify Investments

As you can see from the examples above, from the executive’s standpoint, there are major advantages to tax deferral, especially if the executive defers over time.

In our example, if the stock registers a six percent growth rate, the executive can take the $200,000 value over 15 years and produce $ 20,592 of annual income ($Total $308,888). Of course, where the executive retires determines the amount of after-tax income received.

In our example, the executive makes the same election to defer the RSUs. However, once the shares are placed in the NQDC plan, and following certain guidelines established by EBS, the plan will sell those shares and allocate the proceeds to a menu of investments that the executive can control.

Similar to the executive’s 401(k) or NQDC plan, he or she has 24/7 access to re-allocate within the tax-deferred plan. They also realize the ability to select when they prefer to make distributions and the like.

Executive Benefit Solutions established and vetted an accounting treatment with multiple accounting and tax firms. Employer access to this treatment is critical to the success of raising participation rates.

What I describe today shows one example of many available on how to utilize corporate benefits to build personal financial wealth.

Where to Access Advice

Many companies today provide their key employees with financial wellness planning. However, not all planners are alike. If you use a fee-based planner, know they earn compensation from other sources. They may also maintain a solid understanding of an individual’s personal assets but not the details of corporate benefits nor the ability to integrate them with personal assets.

One company has created a solution to the needs of key employees struggling with the hard challenges of leveraging work and life assets.

My Financial Coach (MFC) combines the power of Smart Tech™, web-enabled guidance, planning, and advice tool, for all employees’ corporate benefits and personal assets and documents, in one place and in real time.

Take this digital planning tool and combine it with direct access to a personal Certified Financial Planner® professional with a commitment to unbiased financial planning, who inspires and motivates through a coaching approach, and you can quickly see how employees can transform workplace benefits into personal financial wealth.

Even if your executives or employees receive advice on retirement plans elsewhere, say with their own outside advisor, the MFC coaches can and will coordinate every aspect of their financial profile, as well as work alongside your other advisors with zero conflict.

You’ll recall some data we shared in our last post. It is worth repeating:

As reported recently in Forbes, “According to the 1,600 full-time employees surveyed in PwC’s 2017 study, 53 percent of workers report being stressed about their finances, while 65 percent of Millennials said the same. Across all generations — Millennials, Gen X, and Baby Boomers — financial matters were the top cause of stress. Forty-six percent of workers spend three hours or more during the work week thinking about or dealing with financial issues, and 47 percent said their finance-related stress has increased over the last 12 months.”


To workplace wealth,


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