Question 28 — Executive Retirement Plans

Q. I am working with a 501(c)(3) sponsoring a 403(b) plan with employer contributions. The employer is trying to find a way to reward the executive director and the associate executive director who are receiving limited employer contributions to the 403(b) plan because of the nondiscrimination rules. There are a total of 22 employees, and both of the key employees earn more than $120,000 per year. Is there anything the employer can do in terms of rewarding the two directors?

A. Yes, the employer could establish a 457(b) top hat plan which requires that only key employees (decision makers) be included. With the top hat plan, the employer has two options: 

  • The employer could choose to make the contributions to the 457(b) plan on behalf of the two employees. Those contributions, in 2015, would be limited to $18,000 and are treated as salary reduction contributions (subject to payroll taxes); however, if the goal is to reward those two employees, that goal is met with employer contributions.
  • The employer could simply allow the two key employees to make salary reduction contributions to the 457(b) top hat plan up to the $18,000 limit. Since each of those key employees must also be allowed to make elective deferrals to the 403(b) plan, this gives them the opportunity to virtually double the deferrals.  

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