After-tax supplemental retirement plans are an effective, indeed compelling solution for many businesses, their senior executives and other highly skilled professionals. This widespread appeal stems from the plans’ cost effectiveness, portability and minimal administrative requirements.
After-tax supplemental retirement plans are especially compelling to professional service firms in the areas of law, medicine, accounting, engineering and others where a high percentage of employees are highly compensated. And the plans can also be used strategically and effectively at large companies and non-profit organizations.
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Many of these entities do not have extensive HR and financial management staffs. However, the ease of setting up and administering the plans, and the fact that they are individually owned, means a minimal amount of staff time will be required. With individual ownership the plans are portable, which is important for plan participants.
In addition to the plan participants’ after tax-dollar contributions, some companies provide matching contributions as a further incentive to retain these quality professionals. Life insurance is often used to finance these plans because the subsequent income gains are tax deferred. Withdrawals and loans are generally not taxable if structured properly, and the life insurance remains in force for the participants’ lifetime.
With these non-traditional supplemental retirement plans, the company determines who is eligible to participate. While there is no legal limit on contributions, companies and plan providers can put in place such limits. Unlike traditional qualified plans, the portable executive retirement plan can be structured to provide supplemental income distributions before age 59½ or after age 70½, without penalty.
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For the company, the plans are a way to show a commitment to assisting its highly-compensated professionals in saving sufficiently for retirement. In turn, this helps companies attract and retain quality professionals.
Further advantages
Additional advantages for the company or plan sponsor include the following:
- Turnkey design, implementation and administrative services
- Typically, there are lower administrative and overhead expenses than similar purchased policies outside of a company-sponsored executive plan
- Any contributions to the policy by the company/plan sponsor will be fully tax-deductible
- Policies are fully-owned by employees, thus freeing the company of related liabilities
- Contributions to the plans come from payroll deductions, thus making the plans easy to use
- Not subject to 409A or 457(f) regulations
There are also many advantages to plan participants, such as the following:
- Contributions to the life insurance policy will grow without tax and could ultimately be withdrawn tax-free
- Contributions are not subject to the limitations of qualified plans
- Since the policy is owned by the employee, there is no employer insolvency risk to plan participants
- A diverse menu of investment options can be offered, including sophisticated asset allocation tools and participant investment consulting
- Access to extensive insurance company support services after retirement or termination
As an increasing number of baby boomers approach retirement, skilled professionals will place greater value on working with companies which provide these important after-tax executive retirement plans. Companies that assist executives and other highly-valued professionals in utilizing these plans will be able to cost effectively and efficiently retain and attract top-quality people.
