In modern business strategy, Non-Qualified Deferred Compensation (NQDC) plans offer a distinct alternative to traditional benefits like 401(k)s. These plans allow employees to defer compensation into whole life insurance policies, providing employers, especially smaller businesses, with a strategic means to incentivize and retain talent. Through NQDC plans, employers like Gary, a construction company owner, can fuel growth, reward performance, and offer reliable pensions, positioning themselves as top employers while ensuring long-term prosperity for both the company and its employees.
Smart Business Ownership: The NQDC Plan for Small Businesses
Written By: The Legacy Project Team
There is a seemingly endless supply of selections in the intricate tapestry of modern business strategy. How various companies maintain top, competitive talent is as unique as a Boeing is to an Airbus…except maybe without doors flying off…and wheels. Most business owners look to the common practices of their competitors and try to match or replicate in order to “keep up with the Jones’.” Are there other possibilities out there? Is the 401K matching, bonus incentives, or stock options the only mechanisms to offer high performing employees to keep them from going to a bigger, more established company? Resoundingly, no! In fact, there used to be more options that were more beneficial for employees than there are now. Before the 1980s, pension plans were very common and exclusively used by companies alongside the implementation of Social Security, a government program still active today. Business owners would have insurance companies setup and maintain the pension plans for their employees. That is, until many business owners took unnecessary risks and dissolved those pension plans in bankruptcy. In the 80’s, the 401(k) emerged as the new “gold standard” in employee benefits and became the primary means of providing employee benefits across the nation. Employee-matching 401(k)s and various other versions have become the commonly accepted retirement vehicle, as most people don’t know any other options exist.
But if you are a small business with fewer than 200 employees, do you have options outside the 401(k) structure? Yes. There are actually plenty of choices. One of those possibilities is the main topic of this article that includes, you guessed it, leveraging an IBC designed Whole Life Insurance policy that provides for several employee benefits. Few tools wield as much potential for long-term prosperity as a non-qualified deferred compensation (NQDC) plan. This innovative financial instrument, when employed with foresight and precision, not only serves as a means of incentivizing employees but also becomes a cornerstone of strategic growth and financial stability within the organization itself.
So, what is an NQDC Plan?
A Non-Qualified Deferred Compensation (NQDC) plan is an employer-sponsored compensation plan that allows employees to defer a portion of their compensation to a
later date, typically during retirement. These delayed funds funnel directly as contributions (or premiums) to a whole life insurance policy from a mutually-owned company. If that last sentence didn’t ring a bell, these are the foundational building blocks to practicing the Infinite Banking Concept. Let’s first discuss the powerful benefits to the employer (company), then examine the remarkable benefits to the employee.
Unlike qualified retirement plans (e.g., 401(k)s or IRAs), NQDC plans do not meet specific Internal Revenue Service (IRS) requirements for tax-advantaged status. This means that initially, contributions to NQDC plans are not tax-deductible for the employer, and the funds are not tax-deferred for the employee until they are distributed. This may seem disadvantageous compared to a normal qualified retirement plan, until you pair it with the utilities of the Infinite Banking Concept. What does this mean?! Essentially, the company (the sponsor) is actually able to deploy the accumulating cash value inside their employee’s NQDC policy, leveraging that uninterrupted compound growth for various company needs e.g. growth initiatives and emergency capital. Once the employee satisfies the contractually agreed upon years of service with the company, then the employee takes ownership of the matured policy.
While this can be, it is not exclusively intended to be a stand-alone strategy. This concept could be used in conjunction to standard packages seen across the industry to provide yet another incentive to retain key talent.
Let’s consider a real estate broker named Gary who is able to harness the power of NQDC plans to fund business-related expenses, provide employee benefits, and create pension opportunities for his key, high-performing agents, thus promoting long-term retention.
At the nexus of Gary's strategic vision are three key components. First involves the recognition that the cash value accumulated within NQDC policies can serve as a potent resource to fuel business growth and expansion (via policy loans). By strategically leveraging this cash value, namely the money that he was going to pay his employees anyways, Gary ensures that his brokerage remains agile and resilient in the face of evolving competitive dynamics and market pressures. This gives a clear advantage to Gary who is just repurposing money he was going to spend anyway on commission payroll. This is important to understand. Let’s make it even simpler:
Gary has to spend money on marketing for his brokerage.
Gary has to pay his agents’ commission split.
Gary has to find a way to attract top talent, and he wants to offer attractive incentives that will also retain them on his team.
Using the NQDC strategy:
Gary pays for marketing from the cash value of his agent’s policy, as he is the owner until they retire (or at a specific year agreed upon by both parties).
Gary still pays his agents with a fraction of pay going to the NQDC strategy (which subsequently funds business expenses) and allow him to…
…maintain top talent as this strategy guarantees the employee living benefits, bonus incentives, and the ability to offer a pension in retirement years!
Business owners encounter several challenges regarding Key Employees:
Need to retain and reward key employees
Protection against death of a key employee
A mutually beneficial solution i.e. rewarding compensation, but with retention
These challenges are normally solved by your standard qualified account options (e.g. IRA,
Roth, 401k). While these solve a portion of the problem, they also have certain restrictions.
Qualified plans have limits on their non-discrimination rules that may prevent key employees (with high compensations) from saving enough money for retirement. In other words, the higher dollar amount the employee makes, the smaller percentage of their salary they can put away due to maximum contribution limits (see October 2023 Newsletter which talks about this).
Qualified accounts don’t solve your need for security for the company and the employee’s family in the event of premature death. If a top-level performer on your team dies, the performance of the company will drastically suffer! Without the right contingency plan in place, you now need another top performer yesterday AND capital.
Top employees have other options! What do you have to incentivize them to stay?!
In addition to needing to protect your company from the death of a key individual or top performer, providing incentives for your top talent to stay with the company is imperative! Gary is also able to provide a flexible framework for rewarding employee performance and incentivizing excellence. He can accomplish both / and with the same mechanism. For Gary and his team of real estate agents, this translates into the implementation of a bonus structure that recognizes and celebrates exceptional achievements. As agents surpass key milestones, exceed sales targets, or demonstrate outstanding client service, they become eligible for bonuses funded by the accumulated cash value within their NQDC policies. This innovative approach not only fosters a culture of recognition and motivation, but also aligns the interests of the brokerage with those of its agents, driving productivity and engagement across the organization.
As agents progress through the vested period of their NQDC plans, the accumulated cash value serves as the foundation for pension options, providing a guaranteed and reliable source of retirement income once the policy matures. This long-term perspective not only ensures financial security for agents in their retirement years, but also reinforces their commitment to the brokerage throughout the duration of the plan.
By offering a comprehensive package that includes both short-term bonuses and long-term pension options, Gary positions his brokerage as an employer of choice, attracting and retaining top talent who seek stability and prosperity in their careers.
Beyond the realm of retirement benefits, NQDC plans also offer a multitude of living benefits inherent in specially designed whole life insurance policies. These policies provide additional riders such as critical illness, terminal illness, chronic injury, and accelerated death benefit riders, offering financial protection in the face of unforeseen medical crises or hardships (see our April 2023 Newsletter). For Gary's agents, this enhanced coverage provides peace of mind and security, ensuring they are supported not only in their professional endeavors but also in their personal lives.
In essence, NQDC plans align with the principles of the Infinite Banking Concept, enabling Gary to reclaim the banking function of his brokerage and optimize its growth while retaining top talent. By leveraging the liquidity and living benefits of specially designed whole life insurance policies, Gary creates a financial ecosystem where every dollar invested contributes to the brokerage's growth and the prosperity of its agents. As Gary and his team embrace this holistic approach to financial planning and business strategy, they stand poised to achieve new heights of success and prosperity in the dynamic world of real estate.
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