b'THE OFFICIAL NFBA MAGAZINEmandate. At a minimum, 50% of the annual awardCash-Based Plansshould be deferred in order to achieve retentionCash-based plans are the most prevalent, attributes; a higher deferral percentage is evenparticularly in small- to mid-sized companies. better. Deferred benefit payout and/or years of requiredNonqualified Deferred Compensation Plans participation are determined solely by the owner.In addition to employer contributions, Nonqualified Payout age and/or years of participation can beDeferred Compensation (NQDC) plans enable key individualized or consistent among all participants.personnel to defer compensation on a pre-tax basis, Payout can be lump sum or over a period of yearsin excess of qualified retirement plan limits. NQDCs (e.g., three, five, seven). Vesting, prior to payout,possess many of the same features and benefits of a BUSINESS MANAGEMENTis also left to the owners discretion. The morequalified 401k plan, but without the corresponding stringent the vesting, the tighter the retentionnondiscrimination testing requirements. attributes.This feature creates greater administrative Deferral percentages, time period, and vestingcomplexity with NQDC plans compared to other schedules are all plan design variables that mustcash-based design alternatives. Company tax be balanced between the owners retention goalsdeduction and executive tax obligation are both and the participants motivation levels. deferred until benefit payout/receipt. Communication To ensure nonqualified status, and as a result less Lastly, the plan details must be communicatedstringent IRS involvement, NQDC plans must cover via a written plan summary for each chosenonly highly compensated employees or management participant. While this seems like common sense,group and must be disclosed to the U.S. Department it is an often underestimated and overlooked aspectof Labor. that is critical to a successfully implemented plan.Phantom Stock PlansParticipants must understand the motivation behindUnder this design, annual award is translated into the offer, why they were selected to participate, howunits of synthetic stock (equity) and held in an the plan is going to operate, and what they mightaccount for each key manager. The number of expect in projected benefits once benchmarks areunits awarded is strictly dependent upon the dollar achieved.amount of the award and the companys underlying Communication about the plan ideally takesstock value. The value of the phantom units place after all designs/projections have beenincreases and decreases in unison with changes in completed and implementation begins. It can occurthe actual stock value. individually or in a group, onsite or off-site, andAs the key employee strives to increase company with or without professional assistance. This is alsovalue, he or she in turn creates more value within an ideal time to determine if any noncompete orhis or her unit award balance. Any dividends paid confidentially agreements are desired to protecton the underlying stock can also be credited to the company data and/or keep the plan confidentialemployees account. from other employees.When the employee attains 100% vesting, units Confidentiality can be tricky. On the one hand,are exchanged for cash. If he or she terminates you want to avoid alienating any up-and-comingemployment prior to 100% vesting, then the key personnel; employees who learn of theircompany pays out only the vested balance in cash exclusion from the plan may become disgruntled.equivalent. Cash payment is deductible to the On the other hand, it can also offer motivationcompany when paid and taxable to the recipient for developing talent to work harder to earn anwhen received.invitation into the plan.Supplemental Executive Retirement PlanTYPES OF INCENTIVE/RETENTION PLANS Under this design, the company agrees to provide Once design variables have been identified andsupplemental retirement income to the executive if modeled, the next step is to determine if the keycertain pre-agreed eligibility and vesting conditions employee incentive/retention plan should be cash-are met. Like a phantom stock plan, a Supplemental or stock-based.Executive Retirement Plan (SERP) is 100% 10 / FRAME BUILDER - MAY2023'