1. Primary Uses of Deferred Compensation
Nonqualified Deferred Compensation
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2. What is a deferred comp plan
What is a deferred comp plan? An employer-sponsored benefit for key employees you choose. It’s basically an agreement between you and your key employees. Those who participate defer a portion of their annual compensation into the plan before taxes. And you promise to distribute that money, plus any earnings and additional employer contributions, to them at a future time.
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3. What we’ll cover today 401(k) Restoration & Retirement Savings
Taxation Timing
Compensation Management
Other Planning Opportunities
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4. 401(k) Restoration & Retirement Savings
Primary Uses of Deferred Compensation
401(k) Restoration & Retirement Savings
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5. Principal 2015 Trends in Nonqualified Deferred Compensation
More than 7 in 10 participants say deferred comp is important in reaching their retirement goals.
Principal 2015 Trends in Nonqualified Deferred Compensation
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6. Your retirement savings gap could be between
The Retirement Gap
Your retirement savings gap could be between
40% - 60% of your need
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7. 401(k) restoration “Restore” benefits limited under a 401(k) plan
Allows eligible key employees to defer into the plan
Any amount restricted by 401(k) plan non-discrimination testing
Up to the maximum 401(k) plan amount
Company contributions follow employee deferrals
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8. Retirement Savings – beyond restoration
Addressing the retirement gap higher earners face
Deferral limits can be raised, or more commonly, eliminated
May or may not include company matching amounts and/or discretionary profit share contributions
Employer has the ability to choose which key employees to reward and how much to reward each
Plan design may allow the ability to create tiers of the Top Hat Group with different limits, employee contributions and vesting schedules.
Retirement savings – going beyond 401(k) restoration
Addressing the retirement gap higher earners face.
Deferral limits can be raised, or more commonly, eliminated.
May or may not include company matching amounts and/or discretionary profit share contributions.
Employer has the ability to choose who to reward and how much. Plan design may allow ability to create tiers of the Top Hat Group with different deferral limits, employer contributions and vesting schedules. 8

9. Primary Uses of Deferred Compensation
Taxation Timing
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10. Taxation timing
Help manage the impact of taxes using the plan’s flexibility for when benefits are paid.
Eligible key employees may use deferred comp plans to choose when they receive the deferred income including the option to take installments. They can also delay distributions beyond the originally scheduled timing.
NQDC offers participants considerable flexibility and control over when benefits are paid to meet their objectives and timing needs. This increased control allows them not only to create accounts to meet different objectives but also provides the distribution flexibility to control when they take receipt of the money; and thereby the amount of taxes they pay.
With the guidance of their tax advisors, eligible executives with variable income components may use the NQDC plan to choose when they take distributions including the option to take installments. In addition, plan participants have the flexibility of delaying distributions beyond the originally scheduled timing.
Participants have the ability to coordinate their NQDC distributions with distributions from Social Security or other pre-tax retirement plans such as a 401(k) plan. Often participants will fund their retirement with NQDC distributions first, then receive qualified plan distributions later.
Participants can defer distributions while they’re working and their marginal tax rates are potentially high and then take the distribution during retirement when their effective tax rate may be lower.
Income tax would be payable in the year the money is actually received by the executive. 10

11. Taxation timing (continued)
Participants have the ability to coordinate the timing of receiving deferred comp income with social security or other benefits such as a 401(k) plan.
Often participants will fund their retirement with deferred comp first, then receive 401(k) plan income later.
Participants can delay receiving deferred comp income while they’re working and their tax rates are potentially high and instead take them during retirement when their tax rate may be lower.
Income tax is payable in the year money is actually received by the key employee.
NQDC offers participants considerable flexibility and control over distributions to meet their objectives and timing needs. This increased control allows them not only to create accounts to meet different objectives but also provides the distribution flexibility to control when they take receipt of the money; and thereby the amount of taxes they pay.
With the guidance of their tax advisors, eligible executives with variable income components may use the NQDC plan to choose when they take distributions including the option to take installments. In addition, plan participants have the flexibility of delaying distributions beyond the originally scheduled timing.
Participants have the ability to coordinate their NQDC distributions with distributions from Social Security or other pre-tax retirement plans such as a 401(k) plan. Often participants will fund their retirement with NQDC distributions first, then receive qualified plan distributions later.
Participants can defer distributions while they’re working and their marginal tax rates are potentially high and then take the distribution during retirement when their effective tax rate may be lower.
Income tax would be payable in the year the money is actually received by the executive. 11

12. Practical deferral elections
Key employee base salary $120,000 Bonus $40,000
Key employee elects to defer 10% of base pay and 50% of bonus
Objectives:
2 kids need college $$
Planning 2nd home
Build retirement
Deferral Amounts:
Base = $12,000
Bonus = $20,000
Total = $32,000
Annual deferral elections allocation
20% College Mary
20% College Michael
20% Beach House
40% Retirement
Many nonqualified plans offer “in-service” distribution options which give plan participants a lot of flexibility in planning for life events. This slide illustrates how a nonqualified plan may be used to save for multiple uses, including college education and a second home, as well as for retirement.
$6,400
$6,400
$6,400
$12,800
June 2020
April 2022
Jan 2026
Retirement
4 Payments
4 Payments
1 Payment
7 Payments
Income tax is payable in the year the money is actually received by the participant. 12

13. Compensation Management
Primary Uses of Deferred Compensation
Compensation Management
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14. Compensation management
Deferred comp plans can provide employers with a program to help recruit, retain, reward the people on whom the success of your business depends on.
Use performance-based contribution and performance- based vesting to motivate key performers.
Customize contribution and vesting schedules to use as performance rewards for key employees.
Deferred comp plans can also provide employers with a program to help recruit, retain, reward and/or provide incentives for the people on whom the success of your business depends. You can use performance-based contribution and performance-based vesting to influence the behavior you want from key performers. You can customize contribution and vesting schedules to use as performance rewards for key employees.
Use discretionary employer contributions based on the particular needs of your organization. Deferred comp plans can be customized to fit a wide variety of organization goals. 14

15. Compensation management
Use discretionary employer contributions based on the particular needs of your organization.
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16. Other Planning Opportunities
Primary Uses of Deferred Compensation
Other Planning Opportunities
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17. Other planning opportunities
Deferred comp plans can be valuable to an organization planning for the future. These plans have a lot of flexibility and offer many options:
Provide an ownership experience.
Create opportunities for key employees to be potential future owners.
Deferred comp plans can be valuable to an organization planning for the future. Whether using deferred comp plans to provide an ownership experience – or using it to create opportunities for key employees to be potential future owners – deferred comp plans have much flexibility and offer many options. 17

18. Ownership experience
Employers can customize contribution and vesting schedules measured by phantom stock values. Key employee shares in both increases and decreases in the valuation of the company, which creates an ownership experience.
No dilution like actual equity grants
company
formula
Contributes phantom stock shares to participating executives
# of phantom shares determined by annual gross profit
OWNERSHIP EXPERIENCE – Employers can customize contribution and vesting schedules measured by phantom stock values – similar to “compensation management.” That way the executive shares in the success or failure of the company, which creates an ownership experience without the dilution that comes from actual equity grants.
value
vesting
Declared by board annually
20% per year based on meeting goals 18

19. Insider transition
Closely held corporation funds a deferred comp plan account for current key employees who are possible future owners, setting an account to vest and pay on a “change in control” of the company.
This not only provides incentives and rewards to key employees, it also retains options for the current owner.
INSIDER TRANSITION – Closely held corporation funds a deferred comp plan account for current executives who are possible future owners, setting an account to vest and distribute on a “change in control” of the company. This not only provides incentives and rewards to key employees, it also retains options for the current owner. It also allows the current owner the option to consider both inside and outside sale opportunities. 19

20. Optional triggering event can be retirement
Insider Transition
Example
Sale of business
Change of control
Vesting
Sale to insiders
YES
Account vests & distributes to key employees & is used to execute purchase
Sale to outsiders
Account vests & distributes to key employees as reward for years of service NO
Optional triggering event can be retirement

21. Primary Uses of Deferred Compensation
To “offer a competitive benefits package” #1 choice for why plan sponsors offer deferred comp benefits Non-Qualified Plan Survey by PSCA
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22. Key benefits for plan sponsors
However you choose to design your plan, some key benefits are universal. A deferred comp plan:
Helps organizations recruit, retain, reward key employees
Allows optional company contributions
Restores contributions/benefits limited by IRS testing
Is easier to administer with no discrimination testing, minimum participation or Form 5500 filing, if set up properly
These examples are just a few of the many creative designs using nonqualified deferred compensation to help solve problems for companies and their key employees. With any deferred comp plan it is important to design the benefit around the employer goals and that is where the flexibility of these solutions comes in. Be sure to partner with advisors and providers that have the experience, expertise, dedicated resources and support to properly design and administer this valuable benefit program as part of your total retirement and employee benefit solutions.
No matter what design you choose, a deferred comp plan:
Helps organizations recruit, retain, reward key employees
Allows optional company contributions
Restores contributions/benefits limited by IRS testing
Is easier to administer with no discrimination testing, minimum participation or Form 5500 filing, if set up properly

23. Key benefits for participants
Take advantage of pre-tax deferrals, tax-deferred growth and compounded earnings
Defer up to 100% of compensation to meet savings goals
Design their own investment strategy
Enjoy flexibility and take payouts from the plan without the same age restrictions as 401(k) plans
Key benefits of deferred comp plans for participants:
Take advantage of pre-tax deferrals, tax-deferred growth and compounded earnings
Defer up to 100% of compensation to meet savings goals
Design their own investment strategy
Enjoy flexibility and take payouts from the plan without the same age restrictions as 401(k) plans

24. Primary Uses of Deferred Compensation
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