Today co-ops are constantly in search of top-quality talent to drive organizational success. Attracting, rewarding and retaining these important leaders requires a competitive approach to compensation. A nonqualified deferred compensation plan can be an effective, flexible and low-cost part of your co-op’s compensation strategy.
Plans can be customized to meet specific participant and cooperative needs, including providing supplemental tax-deferred savings opportunities, restoring qualified retirement plan benefits restricted by IRS limits, “keeping whole” retirement benefits enjoyed by a participant at a previous employer, and/or creating incentives for retention or performance.
Such plans are typically limited to a small “select” group of senior management or highly compensated employees. Your co-op’s tax status determines which plans may be offered.
At Homestead, our experienced Deferred Compensation Program team can design a plan or group of plans that help meet your co-op’s particular talent management needs. Our relationship with NRECA and our Deferred Compensation team’s knowledge of the Retirement Security Plan can prove especially helpful when your goal is to replace or restore a similar benefit.
Frequently Asked Questions About Deferred Compensation Plans:
What is a nonqualified deferred compensation plan?
Nonqualified deferred compensation plans are different than qualified retirement plans (such as the Retirement Security and 401[k] plans) because participation is limited to a select group of management or key employees. The term “nonqualified” means that the plan is not required to meet many of the participation, funding, distribution and reporting requirements of the Employee Retirement Income Security Act (ERISA) or the Internal Revenue Code that are obligatory for qualified plans.
Who is eligible to participate in a deferred compensation plan?
Plan eligibility is determined by the co-op and is generally limited to a select group of management or highly compensated employees. Some plans are also available for key employees and/or the co-op’s board of directors.
Why do co-ops choose to offer deferred compensation plans?
Deferred compensation plans can be a key component of your co-op’s executive compensation program to attract, retain and reward a select group of management or highly compensated employees. Some plans allow participants to defer additional income, or co-ops to restore or supplement benefits provided by qualified retirement plans for high-income earners. This allows executives to retire with a similar percentage of pay replacement as the broader employee population. Other plans are designed to reward participants who meet performance goals within a specific time period with supplemental compensation.
What role does my co-op play in plan administration?
Unlike qualified plans, such as 401(k) and Retirement Security plans, where NRECA (or another third party) serves as the plan administrator, deferred compensation plans are sponsored and administered by your cooperative. This means that your cooperative is responsible for plan management tasks, such as:
- Designing and adopting a plan
- Determining participant eligibility
- Enrolling and educating participants
- Monitoring annual contribution limits and vesting dates (as applicable)
- Maintaining beneficiary designations
- Maintaining plan distribution elections
- Initiating and monitoring account distributions
All accounts that are established to hold plan assets are owned by your cooperative (not the participant).
What is the Homestead Funds Deferred Compensation team’s role?
Our team is here to be your trusted advisor. We provide consulting services specifically tailored for your co-op. We can provide guidance on plan design and plan administration and also offer sample plan establishment documents and sample plan participant enrollment and distribution forms.
The consultants on the Homestead Funds Deferred Compensation Consulting team are your first stop for any plan administration or compliance questions. They can provide “best practice” suggestions on all aspects of the plan life cycle including records management as well as plan sponsor and participant communications.
Our Homestead Funds Client Service team can assist with account establishment, funding and distribution issues.
How does a co-op adopt a deferred compensation plan?
First, a member of our Deferred Compensation Consulting team will work with your co-op to determine which type of plan(s) best meets the organization’s needs. Once a plan is decided upon and (as necessary) the design is customized, the next step is to present a plan document to your co-op’s board for review and approval. As mentioned above, we have form plan documents for your co-op to review with your corporate or benefits attorney and adapt to suit your co-op’s needs and objectives. The co-op’s board will then approve the plan via a specific Board Resolution (samples also available). The Plan Document is then executed by a co-op officer.
How long does it take to implement a deferred compensation plan?
Once your co-op has selected the appropriate plan and worked with Homestead’s Deferred Compensation Consulting team to develop and finalize the legal plan document, the new plan can be adopted as soon as board approval is completed. Next, we can work with your co-op on the steps to implement the plan and start enrolling eligible participants. This could take as little as a week if your co-op already knows which plan they are interested in establishing and has a pending board meeting or it can take much longer to determine the right plan and educate your board and other stakeholders.
Are the funds set aside owned by the co-op? If the co-op were to go bankrupt, is the money protected?
With the exception of governmental plans, participants do not have the same protection as a qualified retirement plan. Participants covered by these plans should understand that all deposits (whether participant deferral or co-op contributions) plus earnings are at all times unsecured contractual obligations of the co-op; therefore, any amounts set aside in the employee’s name are not protected from the claims of general creditors of the company. In the unlikely event of a bankruptcy, plan participants are considered unsecured general creditors of the co-op.
Are there any fees associated with NRECA deferred compensation plans?
Yes. Our Homestead Funds Deferred Compensation Consulting team provides services for plan establishment and ongoing operation for a reasonable annual fee based on the plan (or plans) you adopt. Fee information is detailed in the Consulting Services Agreement.
We welcome the opportunity to share our knowledge of industry trends and best practices. For more information, contact the Deferred Compensation Program team at firstname.lastname@example.org or call 703.907.6375.
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