SUPPLEMENTAL RETIREMENT SAVINGS FOR HEALTHCARE EXECS
Non- Qualified Plans
Non- Qualified Deferred Compensation ( NQDC) plans enable an executive to defer salary, bonus pay and other types of compensation into a self- directed investment trust. Funds in the trust can grow, tax- deferred, until withdrawn.
Nonqualified plans are a key component of retirement packages for highly compensated executives. But, says Alexandra Taussig, senior vice president at Fidelity Investments, “many people don’t understand nonqualified plans, and they’re not using them. These plans are a great retirement vehicle for hospital executives and physicians after they’ve maxed out their qualified plans.”
NQDC plans enable high earners to set aside larger amounts for retirement than they can with a traditional 401( k) plan. But, unlike a 401( k), you can’t borrow from an NQDC.
In addition to nonqualified plans, Taussig recommends healthcare execs take a holistic view of their overall benefits. “This is what I call total benefits optimization — helping executives make sure they’re optimizing all of their benefits.”
Another benefit for key executives are so-called golden parachutes. “The typical parachute is part of an employment contract,” says Barry Koslow, chairman of the board at New England Sinai, a for-profit hospital in Stoughton, Mass. “They often provide one to three years’ pay and benefits if terminated without cause and before the expiration of the contract. Some are offset or are truncated when the executive finds a new position.”
A new generation of more mobile hospital executives, along with an active M&A market in healthcare, have increased the relevance of golden parachutes in recent years.
An increasingly popular compensation tool for healthcare providers are supplemental executive retirement plans (SERPs). Similar to nonqualified deferred compensation plans, nonqualified retirement plans do not meet the IRS or Employee Retirement Income Security Act requirements for being immediately tax-deductible to employers. They are often used to additionally compensate high-level executives.
Moreover, SERPs help offset limits on qualified plan benefits. “CEOs generally receive a much lower income replacement ratio at retirement without some type of supplement,” Koslow says.
“A well-designed plan might put a senior officer on the same footing as an ‘average’ employee in terms of replacement ratio. But additional benefits can come from achieving predetermined performance goals and measures.”
There are downsides to SERPs, particularly for nonprofit executives. For one, public disclosures sometimes shed an unwelcome light on full compensation packages. “Contributions are disclosed publicly each year, and when distributed they are disclosed again,” says Koslow, “often leading to undeserved and unwelcome negative publicity.”
Another downside of SERPs in the not-for-profit sector is that plan benefits can be lost in their entirety if the executive leaves before a pre-established time or event. Certain types of SERPs, namely the 457( b), are not subject to this vesting requirement, but carry an $18,000 to $24,000 annual contribution limit, depending on age. The benefits provided by traditional SERPs and 457 plans also are subject to the claims of creditors of the employer. In a bankruptcy, warns Koslow, all or some of the benefits might be lost.
“Many people don’t understand nonqualified plans, and they’re not using them. These plans are a great retirement vehicle for hospital executives and physicians after they’ve maxed out their qualified plans.” — Alexandra Taussig, senior vice president at Fidelity Investments