Benefit trend spotlight: Non-qualified deferral plans

Employers 03.24.2022 4 MIN

A majority of Ayco’s corporate partners (81%) currently offer non-qualified deferral plans as part of their compensation packages. HR leaders use these plans to attract and retain top talent. Their prevalence is on the rise (up from 78% in 2021).¹

Recently, more companies have expressed interest in adding non-qualified deferral plans to provide more tax-deferral opportunities for high-income employees who may be impacted by proposed tax changes. Additionally, we’ve seen companies expanding current plans by increasing salary and bonus deferral limits, as well as adding the option to defer certain long-term incentive awards.

“85% of companies that offer a plan are publicly traded.”

Source: Ayco Benefits & Compensation. Data is based on review of 310 Ayco Corporate partners as of January 2022.

Eligibility and enrollment

The majority of companies we work with currently offer non-qualified plans to senior management levels. However, a newer trend we've seen is offering these plans to a wider group of employees. Typically, enrollments take place in the fall, with active elections required each year.¹

70% of our corporate partners limit eligibility to senior management, including director- and vice president-level and above
- 25% of these companies base eligibility on whether compensation level exceeds current IRC limits
86% of companies have a single deferral election period in November/December
- This structure simplifies administration for the employer as well as deferral-strategy planning for employees
14% of companies offer mid-year enrollment for bonus deferrals
84% of companies require enrollment each year
- Implementing evergreen elections that rollover each year is worth considering. This method can help employees ensure they don’t miss out on deferrals and potential employer matches

Deferrals

For most companies, deferrals start at the beginning of the year (sometimes referred to as a “first-dollar” plan). As a result, they can impact qualified plan benefits, which is a critical planning consideration for executives. Companies have traditionally offered the ability to defer both base salary and bonus—but we’re seeing a growing trend of companies adding the ability to defer certain long-term incentive awards, such as RSUs and PSUs.¹

Over 75% of our corporate partners provide a first-dollar plan
- Less than 25% provide “excess-only” plans in which deferrals begin once a certain IRC limit is reached
- A small percentage offer employees the ability to choose when deferrals begin
64% allow base salary and bonus deferrals
- 27% allow deferral of salary, bonus and long-term incentive awards
- 5% or less allow for salary-only or bonus-only deferrals
Over 50% of Ayco clients offer a company contribution on compensation in excess of IRC limits
- 55% offer the same match as the 401(k) plan
- Long-term incentive awards are typically not matched

Investment options

Investment options differ by employer but often are similar to the company’s qualified 401(k) plan.¹

Over 80% of our corporate partners offer the same investment options as their 401(k), with minor exclusions including brokerage window, stable value fund and company stock fund
29% include company stock as an option, which can provide an additional opportunity for meeting share ownership requirements
11% offer only a fixed rate investment

Distribution options

Over 90% of our corporate partners allow employees to elect both the timing and form of distribution, which provides employees the opportunity to allocate funds toward different goals. While we see a variety of timing elections permitted, the majority of plans include at least a retirement and in-service distribution option. A growing number of companies are adding a separate distribution election for unexpected events, including a change in control, disability and other early terminations. In terms of payment options, the vast majority of companies allow for installment payments over 10 years or more, which may enable employees to avoid non-resident state income tax (depending on where they live).¹

Timing Elections
- 78% allow retirement/separation election
- 66% allow in-service/specified-date election
- 15% allow specified-date/year after separation election
- 5% allow specified # of years after deferral election
Form of Payment
- 96% offer both lump sum and installment payment options
- 93% offer the ability to elect 10+ annual installments at retirement
- 38% of companies accelerate payments if an employee terminates prior to their elected payout

Offering a comprehensive financial wellness benefit reflects your company’s culture and shows your employees you value them. Interested in empowering your employees to take control of their financial lives? Learn more about how Ayco can help.

¹Source: Ayco Benefits & Compensation. Data and information is based on review of 310 Ayco Corporate partners as of January 2022.