An excess plan, more precisely called an excess benefit plan, is an employer's option for providing employees with additional compensation benefits that fall outside of the contribution limits established for retirement accounts by the US Internal Revenue Code (IRC). Most employer established benefit plans are designed to meet the requirements of the IRC so the employer and employee can take advantage of associated tax deductions and exemptions. A benefits plan that does not conform to those requirements is subject to taxation and must be handled carefully with expert legal and tax advice.
Employers can extend certain types of benefits to employees that form a part of an employee's total compensation package. Typically, the benefits include health insurance and retirement contributions but can also include other types of deferred compensation. In a benefit plan, the employer contributes all or a certain percentage of the total cost of the benefit. For example, an employer can pay a part of the premium for each individual employee's health insurance coverage as a part of his compensation.
Compensation for employees can be a deductible business expense under the IRC under most conditions. The benefit to the employee can also be tax-exempt or tax-deferred. For example, contributions to employee retirement accounts can be tax-deductible for the employer and tax-deferred for the employee, but only if the parties comply with all of the provisions of the IRC.
Benefit plans that comply with the IRC are called qualified benefit plans. The IRC places limits on the total contributions that an employer and employee can make to a qualified benefit plan within a year. If an employer wants to provide additional compensation to an employee that exceeds the annual limit set by the IRC, it must use an excess plan.
Typically, the type of situation that calls for an excess plan is in compensation packages that allow for deferred compensation in the form of stock options, for instance. This deferred compensation is a benefit that accrues over time but doesn't have to be paid until the employee leaves the company or retires. Highly compensated corporate executive sometimes have a deferred compensation package that can raise the potential value of their wages without making the company pay the money out immediately.
For the amounts owing under the excess plan not to be immediately taxable to the employee, the plan must be used only after the contribution amount into a qualified plan is exhausted. The company must not put money aside to pay the benefit. It must simply pay the benefit directly when it becomes due, otherwise the set-aside will be treated as taxable income to the employee even though he has no access to the funds. In addition, the compensation must be a benefit that the employee cannot convert into a cash payout.