During the month of March, this blog will focus on an area of expertise that many of you may not be familiar with—Institutional Consulting (or retirement planning).
For a little bit of background information, Moneta Group has been committed to serving on behalf of our clients since 1869. This commitment, combined with a depth and breadth of services and expertise, has attracted the interest of businesses desiring the same independent advice that Moneta Group advisors provide to affluent families and individuals.
To serve those businesses, Moneta Institutional Consulting was created to provide the business community with customized, fiduciary advice. Today, we manage more than 380 retirement plans with more than $3 billion in assets and Institutional Consulting has become a significant, core part of Moneta’s business.
We know many of you do not own the business you work for and therefore have no control over the types of retirement plans the company sponsors. However, for those of you that do this blog will discuss Non-Qualified Retirement Plans (aka 409A Plans) —a type of plan that is underutilized, but can, under certain circumstances, offer significant advantages to the company and some of your employees.
For those of you that do not have control over the types of plans offered, you may want to bring this to the attention of your company to see if it is something that makes sense to consider.
Although these kinds of plans may not be appropriate for all companies, here are some positives first:
- There are no dollar limits to the amount that a participant can defer or the amount a sponsor can contribute on behalf of the participant. Significant contributions can be made to this plan, above what can be contributed to the 401(k) plan.
- This type of plan can create significant flexibility in how compensation is structured for the participants.
- The plan does not actually need to be funded like a 401(k) plan. It can be set up and no money needs to be contributed. Any benefits that are paid can come from corporate assets.
- The structure of the plan and investments, to the extent utilized, are extremely flexible.
- If your 401(k) plan fails the Average Deferral Benefit Test (Compares what highly compensated employees defer vs. non-highly compensated employees), this type of plan can be set up to restore the benefits the participant would have otherwise received. For example, any 401(k) deferrals that would be refunded can be deposited to the 409A plan. In addition, a 401(k) plan is required to cap compensation at $265,000 for 2015. That compensation cap is not required in a 409A Plan. A sponsor can use the entire participant’s compensation when calculating contributions.
- The plan allows for completely discriminatory contributions. For example, if my best salesperson had a great year I can arbitrarily choose the amount of 409A contribution I will give to that participant. I do not need to give any other participants an employer contribution to the 409A plan that year.
- As the plan sponsor you choose the employees that are eligible.
- This type of plan is only limited by the amount of creativity you have as a plan sponsor.
There are, however, some specific issues that should be taken into consideration before offering this type of plan:
- The money in this type of plan remains an asset of the employer. If the company goes bankrupt, these assets are subject to the general creditors of the company. A participant could lose the money they defer and any money the employer contributes.
- The plan sponsor cannot take a deduction for the contributions until the money is “distributed” to the participant.
- The plan sponsor typically pays taxes on the realized gains and dividends of the investments each year, if the plan is funded.
- Only highly compensated employees or a select group of management employees can participate in the plan.
We readily admit this type of plan is not suitable for all employers, but this is an underused type of plan that allows sponsors significant flexibility in how they design their employee benefits programs.
If you have any questions ask your Moneta Advisor. We have the expertise and experience to create and manage these types of plans.