For growing your business, depending on which path you want to go down for retaining and motivating key employees, discriminating when it comes to Employee Benefits and Executive Benefits may… or may not be possible.

If you have a Benefit Plan that falls under the rules of ERISA (the Employee Retirement Income Security Act of 1974–a federal law that set minimum standards for benefit plans in the private sector), then no, you may not discriminate. Plans that fall into this category are Qualified Plans such as Pension Plans and 401(k)s.

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However, if you decide to incorporate Non-Qualified Benefit Plans, which include Deferred Bonuses, Stock Options, Split-Dollar/LifeComp Plans, Section 162a Plans, Stock Appreciation Rights and Excess Benefit Plans, then yes, you can utilize those plans to offer additional benefits to owners and other highly-compensated employees.

Regardless of which path you decide to take, don’t forget that taxes are always lurking in the shadows. To alleviate some of your company’s tax burden, a Defined Benefit Plan (or Pension Plan) might be in order. Although this has been reserved for larger companies in the past, this can be an opportune vehicle for small business owners to create wealth and take sizable tax deductions. This not only benefits the company and owner, but also the employees.

Defined Benefit Plans do fall under the rules of ERISA. The benefit though is that you are able to contribute a much higher amount (could be as high as $200,000+) into a Defined Benefit Plan than you can a Defined Contribution Plan. To add to this benefit, the amounts can be adjusted each year to ensure that a target goal is reached.

However, going this route does put the bulk of the burden (funding and investment risk) on the employer, which is why many businesses have gone the route of Defined Contributions (such as a 401(k) plan). With a Qualified Plan such as this, employees absorb a larger portion of the risk for their retirement investments.

If there were an option that included the best of both worlds, that would have to be the Cross-Tested Defined Benefit / Defined Contribution Plan. As the linked PDF shows, an employer can incorporate both types of plans into their business, offering executives and key employees a specialized Defined Benefit Plan (this is where the ‘cross-tested for discrimination’ part comes in), while also making a retirement plan available through Defined Contribution Plans for the remaining employees. With the proper mix of age and salaried employees versus plan benefits, it could be a win-win situation for all involved.

Whether it’s a Qualified or Non-Qualified plan, there are ways to follow the rules so a business can receive applicable tax deductions. While one cannot specifically discriminate in a Qualified Plan in favor of the owners and highly compensated employees, there are rules and parameters in the law that can potentially allow the owner and key personnel to receive a disproportionately high share of the overall contributions while enjoying current tax deductions.

If you have any questions or would like further information on Benefit Planning for your company, please feel free to contact The Company Coach DFW at any time. We’re here to help in whatever way we can.

Working together toward success,
The Company Coach Team


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