A VALUABLE TOOL FOR REWARD AND RETENTION

1.  Executives in nonprofit organizations (NPOs) receive less retirement income from qualified retirement plans, as a % of final pay, than do non-executives.

  • Why is this?
    • Qualified plans are designed for the non-executive, as is Social Security. They assume the long-term employee, and they have strict discrimination rules as to participation, cap on compensation and vesting.
  • Shouldn’t there be a better balance between the levels of compensation in nonprofit organizations, similar to the balance we see in for-profit organizations?
    • Yes, if we assume that the talents and responsibilities, as well as other organizational aspects, are similar.
  • How do we make the balance more equitable?
    • For-profit organizations fix the problem with various forms of stock (stock options, restricted shares, performance shares and such), and nonqualified deferred compensation.
      • Although the first of these forms is not generally available to NPOs,
      • the second of these (the nonqualified deferred compensation plan) is readily available, using special provisions of the Internal Revenue Code and ERISA.

2.  Combining the provisions of the Internal Revenue Code, ERISA, and related IRS and DOL regulations, and guided by the latest IRS audit manual, an NPO can have a nonqualified deferred compensation plan which is:

  • required to be discriminatory,
  • must not be pre-funded,
  • can be either defined contribution or defined benefit,
  • need not have any participation or vesting provisions,
  • can provide for pre-tax executive deferrals,
  • can provide for pre-tax credits from the NPO:
    • to bring the executive’s benefit
      • up to the level of the non-executive’s as a % of final pay (the “executive equality benefit”), or
      • up to a level in excess of the non-executive’s (the “top hat benefit”),
    • which are no longer reduced by qualified plan benefits,
    • can account for the anti-executive Social Security formula,
    • which have a special “catch-up provision” in the last 3 years before full retirement age (which full retirement age can be selected by the executive), and
    • which coordinate with the “intermediate sanctions” provisions of the Code applicable to Code section 501(c)(3) and Code section 501(c)(4) organizations.

3.  WHY AREN’T NPOs USING THESE READILY AVAILABLE PROVISIONS OF THE LAW?

  • Many decision-makers (who control executive compensation) do not understand the complexities faced by the NPO executive.
  • Decision makers of NPO compensation sometimes do not realize that C-suite executives of NPOs face many/most/more of the complexities faced by executives of for-profit organizations.
  • The general public may think that executives in NPOs should function in a “good guy” capacity, donating their services to the cause.
  • The public is often informed, by news-hungry media, of salary/bonus abuse in a few nonprofit organizations, and led to believe that this is typical of all NPOs.
  • Legislatures often pass laws which don’t understand that NPO executives are often challenged by complexities on a par with what for-profit executives deal with.
  • Nonqualified plan benefits used to be offset by qualified plan benefits; this is not so any more.
  • Possible penalties to executives of too-high compensation.
  • Possible loss of tax status to the NPO.
  • Difficulty in constructing a credible peer group.

ALL OF THESE OBJECTIONS ARE DEALT WITH IN A PROPERLY DESIGNED NONQUALIFIED DEFERRED COMPENSATION PLAN.