By Kari Middleton
LPL Financial Advisor, Medical Wealth Management
Non-qualified deferred compensation (NQDC) plans are contractual obligations of an employer to an employee, independent contractor, or even a director to pay them a benefit in the future.
Physician groups can create these plans for a select group of management or highly compensated employees, including owners and partners. This sort of plan is frequently called a “top hat” plan as it’s a plan for a few select employees, not all employees.
There are several things to consider, starting with entity type. Public companies and private C-Corporations are typically good prospects, and tax-exempt physician groups are also possible candidates
It is also important that the practice will be there to pay the benefits to plan participants. This requires confidence the employer will have long-term profitable operations.
And highly compensated employees (HCEs) need to perceive a benefit from the plan, and an employer who is willing to provide the solution.
Any assets set aside to cover a NQDC plan are owned by the practice, and subject to the creditors in the event of bankruptcy. Employees do not pay income tax on the compensation until the benefits are paid.
Receiving the benefit under any other circumstances would create a taxable event… or what’s known as constructive receipt.
Also, the plan must include under what circumstances a participant will forfeit the benefit. Two examples of forfeiture provisions include “termination of employment for cause “or “termination of employment and enters into competition with the employer”. These provisions are required under IRS rules.
Non-qualified plans can use either a defined contribution or defined benefit plan design approach. Defined contribution designs offer pre-tax deferral of employee compensation and/or employer contributions. These deferrals may reduce current taxable income, while earnings in the plan are tax deferred.
Defined benefit designs offer physician groups the opportunity to accrue benefits above the IRS qualified retirement plan limits and/or provide supplemental benefits to help meet retirement goals.
Kari Middleton is a Registered Representative with and securities offered through LPL Financial; Member FINRA/SIPC; CA Insurance License#0C98340.
This material was created for educational and informational purposes only and is not intended as tax, legal, or investment advice. Please see an investment professional regarding your own specific needs.