Competing for Key Employees in Arizona – 4 Considerations for Employers

Written by Joanna Morrow

Joanna Morrow, Principal and Founder of Employer Benefits & Advice, is an employer consultant and advocate who has worked in the employee benefits industry for over two decades. She works diligently to help employers overcome obstacles in their business by sharing her expertise in Human Resources, Benefits & Compensation, Process Mapping, Risk Management and ERISA/DOL/IRS compliance. She is a licensed life and health insurance professional in the State of Arizona and is an active member of the National Association of Health Underwriters (NAHU).

Competing for Key Employees in Arizona – 4 Considerations for Employers

In recent years, Arizona has grown increasingly attractive as a destination for companies operating in industries like advanced manufacturing, financial services, aerospace and defense, bioscience, health care, technology, and innovation.

Just last month Nikola Motor Company announced plans to make Buckeye, Arizona the new home for its electric truck manufacturing plant, promising 2000 new jobs for our State in 2019.

Key employees typically command large salaries, but the value they add should make them well worth the investment. So how do companies ensure they stand out as the employer of choice for such employees when industry starts to boom?

Beyond traditional compensation and benefits, offering key employees the opportunity to sock away as much tax-favored income as possible in preparation for retirement is a great strategy for employers who find themselves competing for top talent.

Here are four things companies need to consider:

1. Qualified versus Non-Qualified Retirement Plans

There are generally two types of retirement plans– Qualified and Non-Qualified, with tax treatment being the primary difference between the two.

Qualified Plans

  • These are plans where the employer contributions may be deducted immediately as a business expense.

Non-Qualified Plans

  • Alternatively, contributions to a non-qualified plan are not deductible to the employer until the employee takes a withdrawal and is taxed on the income.

2. Pitfalls of 401K for High Income Earners

A traditional 401K plan is an example of a qualified plan.

These plans are great for rank-and-file employees earning less than about $150,000 a year. However, those earning in excess of that amount are severely limited in their ability to save enough tax favored income to reach their retirement goals.

The three main problems are:

Reduced Savings Potential

  • Qualified plans don’t allow executives to save enough of their pre-tax income in preparation for retirement.

Restricted Contributions

  • Executives can only set aside a limited amount. For example, an executive earning $150,000 or more a year may wish to contribute 10% into the plan, however he’s capped at 5% because the rest of the employees are only averaging 3%.

Non-Discrimination Rules

  • In accordance with the Employee Retirement Income Security Act (ERISA) companies are not allowed to use qualified retirement plans like a 401K as a perk reserved only for highly compensated employees. Qualified plans must be offered to all eligible employees.

3. Non-Qualified Deferred Compensation (NQDC) Plans

These plans can be incorporated into an employer’s current qualified plan and can be structured many different ways according to the needs of the participants. Here is an overview of the some of the benefits:

Funding

  • Executives can defer some of their compensation, either salary or bonuses, until retirement.
  • Employers can offer Supplemental Executive Retirement Plans (SERPs), in which additional funding is provided for a defined benefit or defined contribution plan for specialized employees.
  • Plans can be informally funded with life insurance policies and aid in the cost recovery through the income tax-free death benefit.
  • There are no limits on contributions. Hundreds of thousands of dollars may be placed in these plans at the employer’s discretion in a single year.

Tax Treatment

  • No taxes are due on the money placed in these plans until it is received by the executives.
  • Plans avoid IRS requirements for qualified plans and require minimal ERISA compliance.

Payment in the Event of Death or Disability

  • These plans can pay substantial death benefits.
  • Plans pay an executive’s spouse in the event of an executive’s death before retirement.
  • Plans pay out in the event of disability.

Administration

  • Plans are not required to satisfy discrimination testing and can favor highly compensated employees.
  • These plans require minimal reporting and filing, and are usually cheaper to establish and maintain than qualified plans.

4. An NQDC Plan Can Protect the Company Interests

Despite their high incomes, top earners are typically viewed as a business asset, and it is just as important for companies to protect themselves in the event they lose that asset.

We all know stories about the computer company where the key programmer leaves and takes a 49% share of the business with him as he walks out the door. Or the real estate developer who relies on a key designer where that person isn’t necessarily qualified to make competent business decisions in any other aspect of the business.

Here are some of the ways an NQDC plan can help to protect company interests:

Maintaining Control

  • Providing additional, tax favored compensation by way of an NQDC plan can protect the business from having to surrender control at the time of separation. This is valuable because it allows an employer to financially reward a key employee without having to make that person a partner or part owner of the business.

Buying Loyalty

  • Recruiting top talent and providing incentive for them to stay with the company until retirement. Many non-qualified plans have “golden handcuff” arrangements that stipulate that any plan participants who leave the company or go to work for a competitor forfeit their rights to plan benefits.

Protection in the Event of Merger/Acquisition

  • Providing additional compensation for an executive that is terminated in the event of a buyout or takeover. This is sometimes referred to as a “golden parachute clause.”

The ability to grow tax-favored income is attractive to everyone, but particularly specialized employees who command hefty salaries. Now more than ever companies can leverage this value and use it to further and/or protect their own agendas when it comes to growing their success.

If you have questions or would like to learn more about these types of plans, please contact me at 602-903-4047 or email me at [email protected].