Tax Reform May Heighten Impact of NQDC Plans as a Retirement Benefit for Executives

An industry-leading benchmark study of non-qualified deferred compensation plans finds that such plans continue to provide a competitive edge in attracting and retaining key employees – an edge that could be sharpened by tax reform.

That was among the key findings of the Plan Sponsor Council of America’s (PSCA), 2018 Non-Qualified Deferred Compensation Plan Survey, a follow-up to its 2016 study.  The PSCA survey provides insight into common and best practices of deferred compensation plans.  PSCA is part of the American Retirement Association.  

The survey found that the most common reason employers offer a NQDC plan is to “have a competitive benefits package” (36.3 percent) followed by “helping eligible employees accumulate assets (23.4 percent). The research suggests many employers consider NQDC plans to be a key component in attracting and retaining top talent. 

Not only can NQDC plans differentiate the employment value proposition offered to executives, they may prove to be even more valuable following the passage of the Tax Cuts and Jobs Act of 2017, and the federal income tax cap on the deductibility of state and local taxes, which effectively raises the top marginal income tax rate in certain states.  These benefits are increasingly important as executives find their contributions to qualified plans, such as 401(k)s constrained by contribution limits.  Indeed, a “restoration match” was the most common type of employer contribution, provided by 32 percent of NQDC plans, to fill the gap in employer matching contributions to qualified plans created by tax code limits.     

The survey of NQDC plan sponsors - the only independent source of plan benchmarking data on NQDC plans for sponsors and advisors - generated 174 responses from employers who either offer a non-qualified plan now or intend to do so within the next year. The respondents came from a wide variety of industries, included both small and large employers, as well as publicly traded and privately held companies. 

“For employers that have either adopted or are considering adopting nonqualified deferred compensation plans, this survey offers useful insights,” said Bruce J. McNeil, a partner at The Wagner Law Group in Boston and a member of PSCA’s Board of Directors. “The survey can help plan sponsors more effectively develop these employee benefits with broader information from other companies on eligibility, vesting, distributions, and other plan features,” noted McNeil, one of the foremost experts on Non-Qualified Deferred Compensation Plans and Executive Compensation and chair of PSCA’s Non-Qualified Deferred Compensation Committee. 

Ken Raskin, PSCA’s Chairperson of the Board of Directors, said, “We would like to acknowledge the ongoing contributions of PSCA’s NQDC committee as reflected by this project. The information from this survey will be invaluable as we continue to expand our lobbying and research efforts and monitor how the Tax Cuts and Jobs Act of 2017 may further impact NQDC plans, as well as qualified plans.” 

Other key survey findings include:

• Two-thirds of employers allow 10 percent or fewer of their total employees to participate in the NQDC plan.
• Half of employers allow both employee and employer contributions to the NQDC plan.
• Immediate full vesting increased 10 percentage points from35.7 percent in 2016 to 45.9 percent. 
• Nearly 60 percent of plans set money aside to fund benefits. 
• A little more than half of plans use the same investment lineup in the NQDC plan as in the qualified plan. 

The full survey is available for purchase at https://www.psca.org/2018NQDC_report. For more information, please contact Hattie Greenan at [email protected].