This Way to Wealth

By: Alan Friedlander

The restrictions placed on qualified retirement plans, like a 401k, strictly limit the size of the benefits that can be accrued for highly-compensated employees.

When compared to the benefits provided to lower-paid employees, these limitations can produce a "reverse discrimination" effect that results in qualified retirement plans replacing an inadequate percentage of an owner's or key employee's pre-retirement income.

Eligible compensation that can be considered in applying these benefit or contribution limitations is capped at $260,000 in 2014 as adjusted for inflation.

There is, however, a solution to the inadequacy of qualified retirement plan benefits for owners and key employees...a selective executive benefit plan can be used to counter the "reverse discrimination" effects of a qualified retirement plan.

A Selective Executive Retirement Plan offers customized benefits to selected key corporate executives These benefits go over and above those provided to all employees by a qualified retirement plan or any other employee benefit plan. A qualified retirement plan like a 401k must meet nondiscrimination testing rules while a Selective Executive Retirement Plan is a non-qualified plan and can be used to benefit any employee.

The selective plan is an arrangement between a corporation and selected key executives in which the corporation promises to pay the executive a specified benefit at retirement or, if the executive should die prior to retirement, a survivor benefit to the executive's family.

The salary continuation benefits portion that are provided by a Selective Executive Retirement Plan do not require that the executive defer current compensation. Instead, they are a fringe benefit provided by the corporation over and above the key executive's regular compensation. Because the receipt of salary continuation benefits depends on the executive's continued employment with the corporation, a Selective Executive Retirement Plan can serve as a long-term incentive plan designed to encourage the loyalty of the most valued key executives.

As a non-qualified arrangement, a Selective Executive Retirement Plan can offer custom-tailored benefits to those key executives selected by the corporation. The corporation has complete flexibility not only in regard to who can participate in the plan, but also in regard to salary continuation benefit amounts and durations.

In fact, different benefits and benefit formulas can be provided to different key executives. The primary purpose of a Selective Executive Retirement Plan is to provide a supplementary retirement benefit to those key executives who remain with the corporation until retirement. The corporation can determine how large the promised benefit will be, when benefits can begin and for how long they will be payable.

In addition to retirement benefits, a Selective Executive Retirement Plan can include:

·       If the executive dies prior to retirement, a survivor benefit is paid to the executive's family.

·       If the executive dies before all promised retirement benefits have been paid, the remaining benefits can be paid to the executive’s family.

The availability of both pre-retirement and retirement salary continuation benefits from a Selective Executive Retirement Plan frees salary dollars that key executives would otherwise have to spend on their personal financial security needs, meaning that they must make a substantial sacrifice should they terminate employment.

Alan Friedlander owns a Financial Service practice in Chicago’s suburbs. For a free consultation of your situation, feel free to contact Friedlander directly. He can be reached at 847-855-4888 or Alan@FinancialServices4me.net.

Advisory services offered through D.H. Hill Advisors Inc. Securities offered through DH Hill Securities, LLP. Member SIPC/FINRA. (Neither DH Hill nor Friedlander Financial Services offer legal or tax advice.) "This is not meant to be an offer to buy or sell a security"