A 2024 study found that 76 percent of surveyed plan sponsors rank “attracting and retaining executives and other key personnel” as one of the top objectives of their executive benefits offerings.[1]

When the Internal Revenue Service (IRS) annually reviews contribution limits to tax-deferred retirement plans, the amount a worker can save in a qualified retirement plan often increases to reflect cost-of-living adjustments and other contributing economic factors. Whether the amount is raised or stays the same, a cap on maximum contributions applies across the board to all wage earners at all earnings levels.

The 2025 qualified plan contribution limits announced on November 1, 2024, are:

• the 401(k) deferral limit is $ 23,500 plus a $7,500 age 50 and up catch-up contribution.
• the eligible income maximum is $350,000
• the Social Security wage base is $176,100

With limitations on 401(k) plans and Social Security contributions, higher wage earners can only save a small percentage of their total compensation as tax deferred. This cap on savings makes it extremely challenging for these employees to save sufficiently to retire at or near their pre-retirement income level.

Well-designed executive benefits plans can better position highly compensated employees (HCEs) to save effectively for retirement or prepare for other significant life events. Executive benefits strategies, including access to a nonqualified deferred compensation (NQDC) plan, help offset qualified plan and Social Security limitations. However, plan limitations are not the only challenges HCEs face in pursuing retirement readiness and overall financial wellness.

Caps on long term disability (LTD) insurance can result in only a portion of the executive’s total compensation and rewards being covered by insurance. Also compounding the problem is that it is not unusual for employer-provided benefits to vary greatly among different employee pay groups. Companies generally spend more on benefits for the core population as a percentage of salary than on benefits for the executive group. For example, a company that spends 40 percent, as a percentage of salary, on its core workforce may spend (by percentage) only 30 percent on its directors, 20 percent on its executives and 10 percent on its CEO.

Unaware that these savings and financial wellness challenges exist, companies may not realize that the retirement needs of their HCEs are underserved, even though these employees are typically the key leadership and talent on which the business depends most. Likewise, executives may not know that they face a retirement savings shortfall or that their total income is not protected by disability insurance.

Benefits Restoration Strategies for Highly Compensated Employees

An estimated 98 percent of Fortune 1000 companies offer some or all key employees a nonqualified deferred compensation plan as part of their executive benefits package.[2]

Owners and management teams of smaller to midsize businesses may think nonqualified plans are a reward and retention strategy relevant only to large, publicly held companies. However, well-designed executive benefit plans can also effectively restore benefits to highly compensated employees in public or private, smaller to midsize organizations.

An NQDC plan is regulated by IRS Section 409A, which governs most forms of nonqualified deferred compensation. Employers that follow the 409A rules can enable eligible plan participants to defer up to 100 percent of their total compensation on a pre-tax basis.

Disability Income Insurance Limitations and Restoration Opportunities

Twenty-five percent or more of an HCE’s compensation may be paid as a bonus or long-term incentive, which is often excluded from group long-term disability benefits calculations. An example of a typical group coverage formula would be 60 percent of salary up to a maximum benefit of $10,000 to $15,000 per month. Without bonuses or long-term incentives considered when establishing the employees’ covered compensation, the group long term disability payout deficit could look like this:

An employee with a base salary of $200,000 might have an annual bonus of 35 percent and a long-term incentive of 50 percent. Combined, the employee’s annual compensation totals $370,000. Using 60 percent of salary, a typical formula for establishing group benefits, this employee would receive $120,000 annually in the event of a disability claim, which is less than one-third of their total compensation.

Augmenting the executive’s group plan with individual disability insurance coverage means the executive’s insurance payout of 60 percent would be based on their total rewards of $370,000. Their benefit would be $222,000 annually, appreciably increasing their financial stability and that of their family, should they ever need it.

Better Serving the Retirement Readiness of Executives

Employer-sponsored plans and strategically designed executive benefits offerings can help offset the unintended but real benefits shortfall that HCEs face. And like any employee, when

key decision-makers are free from the distraction of personal financial concerns, they are better able to direct their focus and energy to contribute creatively to company success and stability.

Read The Benefits Gap: How it Happens and How to Fix It for more information on benefits restoration. To learn about other executive benefits strategies go to: How Changes to Dodd-Frank Clawback Policies May Affect Your NQDC Plan and Split Dollar Life Insurance as a Deferred Comp Tool for Not-for-Profit Organizations.

Sources:

[1] 2024 Newport/PLANSPONSOR NQDC Trends Survey Report, pg.11.
[2] 2022 Newport / PLANSPONSOR Executive Benefits Survey.

This material has been prepared for informational purposes only, and is not intended to provide, and should not be relied on for, accounting, legal or tax advice. Any tax advice contained herein is of a general nature. You should seek specific advice from your tax professional before pursuing any idea contemplated herein. The examples shown are for illustrative purposes only. The material in this report may contain financial illustrations, which may reflect hypothetical dividends, interest, rates of return,, and/or expense and mortality assumptions, none of which are guaranteed.

Christine Scott is affiliated with Valmark Securities, Inc. Securities offered through Valmark Securities, Inc. member FINRA, SIPC. Investment Advisory Services are offered through Valmark Advisers Inc., a SEC Registered Investment Advisor. 130 Springside Drive, Suite 300, Akron, OH 44333. 800-765-5201. OneDigital is a separate entity from Valmark Securities, Inc. and Valmark Advisers, Inc.

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