Excess Benefit Plans

Example

Mighty Rich Corp.'s qualified defined contribution retirement plan provides annual contributions equal to 20 percent of an employee's compensation for the year, subject to the qualified plan annual contribution limit. For VP Phat Katt, who has an annual salary of $300,000, that potential contribution would come to $60,000 (.2 x $300,000). In 2013, however, only $51,000 can be added annually to Katt's qualified retirement plan account because that is the limit for the year. (The amount increases to $52,000 for 2014.)

Fortunately for Katt, his employer will credit the remainder of the contribution ($9,000) to a nonqualified deferred compensation account, will credit earnings and losses as if the account were invested in the qualified plan, and will pay out the account when the qualified plan benefits are paid.

Tip

Excess benefit plan benefits often accrue and vest at the same rate as an employer's qualified retirement plan. As a result, excess benefit plans are frequently referred to as supplemental retirement benefit plans.

Tip

While excess benefit plans make up benefits lost because of the maximum limits on qualified plan benefits and contributions, supplemental executive retirement plans (SERPs), also known as top-hat plans, can be used for broader purposes like increasing benefits for shorter service employees, recognizing bonus payments in the retirement plan formula, or making early retirement more attractive.