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Non-qualified benefit plan recordkeeping – Revolutionised by technology

With the global talent pool and access to employment opportunities available in the international market, employers today struggle to find, attract, and retain top talent to meet their company’s skill needs. Compensation plans and retirement benefits are some of the key tools employers use to compete for talent, and non-qualified retirement plans are an integral part of that strategy.

But what are non-qualified retirement plans, and what must employers consider when offering them? Let us find out.

Understanding non-qualified retirement plans

Non-qualified retirement plans, or non-qualified deferred compensation plans, are retirement savings plans employers offer to highly compensated employees and key executives as additional benefits outside of the traditional compensation package. These plans allow for both employer and employee contributions and are not subject to participation from the Employee Retirement Income Security Act (ERISA).

Some of the common types of non-qualified plans include deferred compensation plans, supplemental executive retirement plans, executive bonus plans and many more. These are often an attractive part of an executive’s compensation package as they allow flexibility and tax benefits for high-earning executives.

Pros and cons of non-qualified defined benefit plans

As they are not subject to statutory contributions like qualified benefits plans, non-qualified defined benefit plans offer several advantages to both the employees and the employers.

When it comes to the companies,

• These plans help employers stay competitive when attracting and retaining top talent for executive positions.
• Employers can use non-qualified benefits as incentives to motivate employees to meet set performance metrics.
• Depending on the payout options or vesting over time, these plans can boost employee motivation, retention, and satisfaction.

When it comes to the executives and employees,

• These plans offer diverse tax-deferred opportunities to save for retirement. This opportunity to bridge the retirement income gap in the early years of their retirement can allow employees to let their Social Security, 401(K), and other qualified assets continue to grow.
• With no contribution limits, unlike qualified plans like 401(K), high-earning individuals have a greater opportunity to save for retirement while lowering their current income tax obligations.
• Non-qualified plans also offer flexibility in payout options, allowing employees to choose either a lump sum payment or staggered withdrawals over 5 or 10 years.

However, since these plans do not have protection under the ERISA, they also carry some drawbacks, including:

• Non-qualified deferred compensation plans often carry a greater credit risk as they lack ERISA protection. If the company becomes insolvent or declares bankruptcy, there is a risk of you losing part or all of your investments.
• Since executives are essentially investing in the employers’ stock with non-qualified plans, they lack investment diversification and can experience significant losses in their retirement savings if the company loses stock value.
• Despite their flexible payout options, companies can accelerate payouts for executives who leave unexpectedly. This can have significant tax implications and can complicate retirement income planning.

Recordkeeping requirements for non-qualified deferred compensation plans

Although they do not meet the ERISA requirements, non-qualified deferred compensation plans have stringent compliance requirements when it comes to recordkeeping and document management. Some employers might find it challenging to recognise their administrative and operational responsibilities.

Some of the records the employers must store and maintain include:

• Plan documents
• Adoption agreements
• Plan amendments
• Summaries of material modifications
• Summary plan descriptions
• IRS determination letters
• Form 5500s
• Plan non-discrimination testing records
• Demographic information
• Data related to eligibility, vesting, and benefits calculations
• Retirement committee minutes
• Board resolutions
• Trust documents
• Relevant financial records
• Service agreements

Failing to maintain these records for the entirety of the plan can put employers at risk of non-compliance. However, as these records have moved to digital sources from paper ones, life insurance business processing services have stepped in to help companies simplify non-qualified retirement plans' recordkeeping and stay compliant with the evolving regulatory requirements.

How can Infosys BPM help?

As businesses struggle to maintain proper records concerning the non-qualified retirement plans they offer, life insurance business processing services have emerged as a key tool to ensure compliance. Infosys McCamish VPAS® Benefits Plan Administration (BPA) services can help support flexible recordkeeping for sophisticated and complex non-qualified benefits plan designs. With services ranging from liability recordkeeping and asset/liability reporting to data warehouse and data centre services, you can leverage technology to revolutionise how you store and maintain records of the non-qualified deferred compensation plans you offer your employees.