Nonqualified plans are designed to provide specialized retirement benefits for owners, key executives and other select employees. Because these types of plans fall outside of the tax codes that govern plans like 401(k)s, a nonqualified plan does not have to be universally offered to all employees.
Most often, nonqualified plans are associated with Fortune 500 companies. However, they often find their greatest application in smaller, closely held corporations and other businesses, because a nonqualified plan does not need to be deferred compensation or a bonus plan. Nonqualified plans can offer more meaningful benefits, simply by covering a legitimate cost for an employee, like strategic insurance policies. As an incentive to remain with the company, an employer can pay premiums for a variety of insurance policies including life, disability and long-term care. The cost of the premium is generally taxed as income to the employee.
While there is often little tax benefit for both the employee and the company, providing life or disability insurance gives the employee and his family peace of mind they are protected in the unfortunate event of a disability or unexpected death. Life insurance can also be structured to grow cash value that an employee may be able access on a tax free basis, making the benefit a little more tangible. Providing such a benefit can also create loyalty between the company and the employee, as the employee has a need, and the company is willing to fulfill that need in the interest of retaining key talent.
On the other hand, long-term care is often viewed as an “either you need it or you don’t” coverage. In my experience, regardless of how much money you earn, people want to spend their money on things they want—not on something they may or may not need in the future. Therefore, making this type of benefit available is valuable to both the employer and employee.
Long-term care coverage is a particularly appealing benefit because the IRS has determined long-term care insurance premiums paid through a nonqualified plan are not considered taxable income to a non-owner/employee and tax deductible for the employer. In contrast, if paid out of pocket by an individual who itemizes deductions, the taxpayer may be able to deduct long-term care premiums as total medical expenses exceed 10% of their adjusted gross income.
Additionally, the company can also pay for coverage on a non-employee spouse. It is important to know policy benefits received from a long-term care claim are generally not included as income to the individual.
If you are a small-business owner, it can be extremely beneficial for your business to pay for long-term care coverage. The rules are slightly different depending on the structure of your business, e.g., C-Corp, S-Corp, sole proprietor or LLC. When a company pays for the policy as a nonqualified benefit, you begin to see how meaningful this benefit can be.
If you have questions on nonqualified plans for your business, the experts at Henssler Financial will be glad to help:
- Experts Request Form
- Email: experts@henssler.com
- Phone: 770-429-9166.
Disclosures