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Contributions

Contributions to Nonqualified Deferral Plans (NQDP's) are typically made in three forms:

Employee Contributions

Sources
Many plans allow the deferral of various forms of compensation. The majority of plans will permit executives to defer a portion of their base salary. A large number of plans will also permit executives to defer a portion of their bonus.

Basically, an NQDP may be designed to accept any compensation source. Some of the more common sources of deferrable compensation are:

  • Base salaries
  • Short term bonuses
  • Long term bonuses
  • Directors fees
  • Retainers
  • Stock option gains

Amounts
The plan sponsor will choose the minimum and maximum deferral amounts permitted. The decision is an important one, since the greater the deferral amounts, the greater the plan sponsor's potential liability. However, if the selection of the maximum is too low, this may result in participant dissatisfaction.

Minimums and maximums are usually expressed as percentage of compensation source, possibly combined with a flat dollar amount. For example, a typical plan may be set up as follows:

Compensation Source Min/Max Percentage  Min/Max Dollar Amount

Base Salary

10% - 25%

$5,000 - $100,000

Bonus

0% - 100%

None

Director's Fee

0% - 100%

None

Employer Matching Contributions

Similar to a 401(k) plan, an NQDP often provides a matching contribution by the employer. The matching contribution may take on a variety of forms, but typically the match is based on a percentage of the employee's deferral, up to a maximum dollar limit.

A typical matching formula would be a match of 50% of the employee's deferral (50 cents on the dollar) on deferrals up to 15% of compensation. A match may also be tiered: 100% on deferrals up to 10% of compensation, plus 50% on deferrals up to the next 5% of compensation.

Matching contributions are most often made when the participant makes contributions. However, there are plans that credit the match at the end of the plan year as a further incentive for the retention of key employees; a year-end match would normally be credited only to participants who are still employed by the company on the last day of the plan year.

Vesting gives the participant a non-forfeitable right to his or her account balances derived from employer contributions over a certain period of time. Commonly used to retain key employees, vesting requirements are often imposed on employer matching contribution account balances.

Employer Discretionary Contributions

Discretionary contributions are employer contributions that are unrelated to employee contributions. They are analogous to contributions made by an employer to a qualified profit sharing plan, where the employer may or may not make a contribution each year.

The discretionary contribution is not dependent on the magnitude of the employee's deferral, but is most often based on a percentage of the employee's compensation (e.g., each participant will receive a contribution of 10% of compensation, irrespective of their deferrals).

Similar to matching contributions, discretionary contributions can be made throughout the year, or processed at the end of the plan year.

Vesting gives the participant a non-forfeitable right to his or her account balances derived from employer contributions over a certain period of time. Commonly used to retain key employees, vesting requirements are often imposed on employer discretionary contribution account balances.

 

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