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Top hat plans are non-qualified retirement plans offered only to a limited group of key executives and select employees, with different configurations including non-qualified deferred compensation and supplemental executive retirement plans. They often have fewer government regulations, higher interest rates, and no vesting period or penalties for leaving employment. Shareholders may not be aware of their existence.
Top hat plans are a form of retirement plans that are not offered to general employees of a corporation. Instead, this non-qualified retirement plan is offered only to a limited group and is typically reserved for key executives and occasionally a select few employees, depending on the structure of the plan.
This type of retirement plant is different from a standard one in several ways. First, it doesn’t enjoy the tax-qualifying status that national revenue agencies routinely extend to optional retirement plans offered to all employees of a company. Second, the ability to participate in the plan is not necessarily automatic for everyone with a similar level of responsibility within a company. For example, being an executive may not be enough to receive an invitation to participate. Depending on the limits of the plan, there may be additional provisions to adhere to, such as the executive’s place in the company’s operating structure and the salary currently commanded by the employee.
Currently, essentially two types of top hat plan configurations are offered. The first is known as a non-qualified deferred compensation plan, which will allow participants to defer any amount of income in the plan during each calendar year. There is not necessarily any matching contribution made by the employer.
The second common type works a little differently. Known as a Supplemental Executive Retirement Plan, the employer provides the funds for annual contributions to the plan. There are typically limits based on factors such as annual salary that will determine the exact amount of financing provided.
Unlike retirement plans offered to employees, a top hat plan often doesn’t have to comply with as many government regulations. This means that the interest rate associated with the plan may be higher than a traditional 401K retirement plan. Executives may not have to endure a vesting period before being considered full participants in the plan, and there may also be no penalties affecting the value of the participation if the executive chooses to leave employment with the company.
The actual cost of this type of plan can be lumped in with the costs associated with any other general retirement plan offered by the company, so shareholders cannot easily identify the amount of assets flowing into it. In fact, shareholders may not even know that this retirement plan option is available.
Smart Asset.
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