COVID-19 Has Low Impact on Nonqualified Plan Design and Administration

Despite the unsettling effects of COVID-19 on businesses and employee pay, savings and positions, Newport says it has been encouraged to see plan sponsors implementing new nonqualified deferred compensation (NQDC) plans leading up to and during the pandemic.

Newport’s experience was reported in the Newport/PLANSPONSOR 2020 Executive Benefit Survey, which recently found that these plans have become a more prevalent part of employee retirement programs. Nearly all (98%) of the 300 companies that participated in the survey said they currently offer a NQDC plan.

The COVID-19 pandemic has not had a great effect on plan sponsors’ need to review their nonqualified plans. Eighty-four percent of companies reported that they do not have any intention to review their plans due to the impact of COVID-19. And only 10% indicated that they will review the need for a nonqualified plan.

Still, Newport says, there will likely be some changes in 2021 in how plan sponsors communicate with and educate participants about their NQDC plans. In the survey, employers reported that participants in NQDC plans were very satisfied with how these plans help them reach their financial goals with the investment choices offered. However, employers say these participants want an enhanced online experience, more robust communication and education programs, and improved tools to allow them to more effectively manage and forecast their accounts.

“As NQDC plans become a staple of employee retirement programs, it is critical that they have the same array of online and communication offerings as qualified plans,” says Newport Vice President Jeff Currie, who leads the company’s nonqualified client services team.

This year’s survey explored other impacts of COVID-19 on plan sponsors and their NQDC plans. Three in 10 companies reported that they have reduced executive pay to assist with cash flow during the pandemic. However, 36% said they do not intend to make any compensation reductions. The rest are still contemplating the best way to help their companies survive.

Among companies that reported separations of key management personnel, 61% said the separations were permanent—which could trigger payments from NQDC plans. Thirty-nine percent reported that the separations were temporary and that they plan to bring back the employees within a six-month window. Newport points out that the six-month window is important. A furlough or leave of absence generally will not trigger a payment from an NQDC plans, but, if it lasts longer than six months, it would be considered a separation of service for the purpose of a NQDC plan distribution.

Just as there was not a big rush to pull money from qualified plans after the Coronavirus Aid, Relief and Economic Security (CARES) Act was passed, there were few requests for financial emergency hardship withdrawals from nonqualified plans, the survey found. Eighty-seven percent of plan sponsors reported they had no requests for financial emergency hardships from NQDC plan participants. Eight percent said there were requests to stop deferrals and 5% said there were requests to stop deferrals and get a distribution. According to the survey, only 5% of plan sponsors reported that they granted any participant requests. Newport explains in the survey report that under Internal Revenue Code (IRC) Section 409A, there is a high hurdle to clear to get approval for an “unforeseeable emergency” hardship.

“Overall, we have seen less direct impact to NQDC plans as the CARES Act provided tax-preferred relief primarily for distributions from qualified plans,” Newport says in the survey report. “We have also seen most plan sponsors continue to operate their NQDC plans with no changes to their 2020 enrollment calendar. Most of them conducted their mid-year bonus enrollments as scheduled and are planning to offer participants the opportunity in the coming months to defer salary and bonuses earned in 2021.”

The Newport/PLANSPONSOR 2020 Executive Benefit Survey report includes findings about NQDC plan design, administration and funding, as well as hard-to-find information about supplemental executive retirement plans (SERPs). The report may be downloaded from here.