What is a nonqualified deferred compensation plan?
Nonqualified deferred compensation plans are different from qualified retirement plans (such as the Retirement Security Plan and 401[k] Pension Plans) because participation is limited to a select group of management or key employees. The term “nonqualified” means that the plan is not required to meet many of the participation, funding, distribution and reporting requirements of the Employee Retirement Income Security Act (ERISA) or the Internal Revenue Code that are obligatory for qualified plans. However, depending on plan type, there are strict IRS rules governing employee eligibility, plan contributions and distributions, and taxation.
Who is eligible to participate in a deferred compensation plan?
Plan eligibility is determined by the co-op and is generally limited to a select group of management or highly compensated employees. Some plans are also available for key employees and/or the co-op’s board of directors.
Why do co-ops choose to offer deferred compensation plans?
Deferred compensation plans can be a key component of your co-op’s executive compensation program to attract, retain and reward a select group of management or highly compensated employees. Generally these plans allow eligible employees to defer additional compensation and to supplement benefits from qualified retirement plans. Some plans can be used to supplement and/or restore benefits provided through the Retirement Security Plan or other defined benefit plan for executives whose retirement benefits may be adversely affected by IRS salary limits and/or ERISA rules. Other plans are designed to provide compensation incentives based on specific performance goals.
What role does my co-op play in plan administration?
Unlike qualified plans, such as the Retirement Security Plan and the 401(k) Pension Plan, where NRECA (or another third party) serves as the plan administrator, deferred compensation plans are sponsored and administered by your cooperative. This means that your cooperative is responsible for plan management tasks, such as:
- Designing and adopting a plan
- Determining participant eligibility
- Enrolling and educating participants
- Monitoring annual contribution limits and vesting dates (as applicable)
- Maintaining beneficiary designations
- Maintaining plan distribution elections
- Initiating and monitoring account distributions
All Homestead Funds accounts that are established to hold plan assets are owned by your cooperative (not the participant).
What is the Homestead Advisers Deferred Compensation team’s role?
Our team is here to be your trusted advisor. Homestead Advisers provides consulting services specifically tailored for your co-op. Homestead Advisers can provide guidance on plan design and plan administration and also offer sample plan establishment documents and sample plan participant enrollment and distribution forms.
The consultants on the Homestead Advisers Deferred Compensation Consulting team are your first stop for any plan administration or compliance questions. They can provide “best practice” suggestions on all aspects of the plan life cycle, including records management as well as plan sponsor and participant communications.
Our Homestead Funds Client Service team can assist with account establishment, funding and distribution questions.
How does a co-op adopt a deferred compensation plan?
First, a member of the Homestead Advisers Deferred Compensation Consulting team will work with your co-op to determine which type of plan(s) best meets the organization’s needs. Once a plan is decided upon and (as necessary) the design is customized, the next step is to present a plan document to your co-op’s board for review and approval. As mentioned above, Homestead Advisers has form plan documents for your co-op to review with your corporate or benefits attorney and adapt to suit your co-op’s needs and objectives. The co-op’s board will then approve the plan via a specific Board Resolution (samples also available). The Plan Document is then executed by a co-op officer.
How long does it take to implement a deferred compensation plan?
Once your co-op has selected the appropriate plan and worked with Homestead Advisers’ Deferred Compensation Consulting team to develop and finalize the legal plan document, the new plan can be adopted as soon as board approval is completed. Next, Homestead Advisers can work with your co-op on the steps to implement the plan and start enrolling eligible participants. This could take as little as a week if your co-op already knows which plan it is interested in establishing and has a pending board meeting, or it can take much longer to determine the right plan and educate your board and other stakeholders.
Are the funds set aside owned by the co-op? If the co-op were to go bankrupt, is the money protected?
With the exception of governmental plans, participants do not have the same protection as a qualified retirement plan. Participants covered by these plans should understand that all deposits (whether participant deferral or co-op contributions) plus earnings are at all times unsecured contractual obligations of the co-op; therefore, any amounts set aside in the employee’s name are not protected from the claims of general creditors of the company. In the unlikely event of a bankruptcy, plan participants are considered unsecured general creditors of the co-op.
Are there any fees associated with NRECA deferred compensation plans?
Yes. Our Homestead Advisers Deferred Compensation Consulting team provides services for plan establishment and ongoing operation for a reasonable annual fee based on the plan (or plans) you adopt. Fee information is detailed in the Consulting Services Agreement.