A U.S. start-up subsidiary of a foreign pharmaceutical corporation was seeking to provide salary and bonus deferral opportunities for its executives and grant one of the executives with additional deferred compensation that would recognize both his past service and particularly important role in the organization. While the corporation already maintained a qualified 401(k) plan for its employees, it did not maintain any nonqualified plan arrangements for executives. Challenges presented by this case included the following:
- The decision-makers at the corporation (many of whom were scientists) were not familiar with the intricacies of nonqualified plan design, compliance, and administration
- The participants to be covered by the plan were
- based in separate geographic locations and
- of varying ages, thereby having different distribution needs
- One current senior executive had already completed many years of valuable service, but would not have sufficient time to accumulate the desired funds under the new plan if limited to only future pay deferrals.
The Milliman solution
Milliman worked closely with the corporation to develop a plan design that was sufficiently flexible to address the disparate needs of the participants while remaining compliant with the strict IRS requirements mandated by Section 409A. The plan’s final design allowed all participants the opportunity to make separate annual salary deferral elections and bonus deferral elections. In addition, it gave the corporation the discretion to reward designated participants with an additional employer contribution. This feature would enable the plan to meet the corporation’s targeted goal of rewarding the one current senior executive as well as any future participants they deemed eligible for such supplementary allocations. To address the need for different distribution dates, the plan’s payment provisions were structured to provide participants with the maximum flexibility permitted under law so that they could make advance elections regarding the timing and form of payment options that would apply to each year’s allocations. They could designate that all or a portion of the deferrals be allocated into:
(1) A “Termination of Employment Account” to be distributed when they separated from service with the company and/or
(2) A “Specified Age Distribution Account” to be distributed at a future age selected by the participant.
In order to provide additional distribution flexibility, participants would be given the opportunity to elect among three forms of payment for each account: single lump sum payment, five substantially equal annual installments, or 10 substantially equal annual installments. “Specified Age” and “Form of Payment” elections had to be made when the participants made their initial election to defer compensation under the plan; however, subsequent changes would be permitted, provided such changes complied with the applicable Internal Revenue Code Section 409A rules. Participants would also have the ability to select the investment vehicles which would be used to determine the investment experience to be credited to their accounts.
Once the plan design was finalized, we drafted the required plan document and related materials for review by the client’s legal counsel. In addition, we assisted them with the electronic filing of the ERISA-mandated top-hat notice of the plan to the Department of Labor. After the client’s board of directors formally adopted the plan, the corporation expressed an interest in having Milliman assist it in establishing administrative procedures and investment vehicles for the plan. We connected them with an investment company to serve as trustee for the rabbi trust that would be used in conjunction with the plan. We helped them establish general parameters regarding how many and what types of investments they wished to offer under the plan, and then helped them make specific choices in each investment fund category. We continued to work closely with the corporation’s contacts to ensure that the plan would be properly communicated to the participants. Because the participants were spread across the country, we developed and delivered a PowerPoint presentation via WebEx to effectively communicate the new plan and the deferral and investment options.
The open enrollment went smoothly with all of the eligible executives electing to join the plan. We helped the client work with its payroll company to ensure that the proper payroll deductions and withholding would be made. Going forward, we will provide them with quarterly statements for each participant, monitor and report the performance of the investment funds they selected, and assist them with the annual deferral election process for the plan. We will also continue to assist them with all other aspects of the plan’s annual administration (e.g., processing participants’ directed investment fund elections and transfers as well as plan distributions). As a result, the client was extremely satisfied with the new plan and the full array of services provided by Milliman.