A registered compensation agreement, or RCA, is a type of tax-deferred retirement plan that is offered to highly compensated employees. This type of plan is designed to provide an additional retirement benefit to employees who may already be contributing to other types of retirement plans, such as a 401(k) or IRA.
An RCA is typically established by an employer and is funded entirely by the employer. The employer makes contributions to the plan on behalf of the eligible employees, and these contributions are tax-deductible for the employer. The contributions are also tax-deferred for the employees, meaning that they are not taxed until they are withdrawn from the plan.
To be eligible for an RCA, an employee must be considered highly compensated, which is typically defined as earning more than $130,000 per year or being a key employee. The plan must also meet certain IRS requirements, including annual reporting and compliance testing.
One of the benefits of an RCA is that it allows highly compensated employees to save more for retirement than they would be able to with other types of plans. Additionally, because the contributions are tax-deferred, employees can potentially lower their current tax liability.
However, there are also some potential downsides to an RCA. For example, if the employer goes bankrupt or is unable to make contributions to the plan, employees may not receive the full benefit they were expecting. Additionally, because the plan is funded entirely by the employer, employees have no control over how the funds are invested.
Overall, an RCA can be a useful retirement planning tool for highly compensated employees. However, it is important to fully understand the potential benefits and risks before participating in the plan. As with any retirement plan, it is also important to regularly review and adjust your savings strategy as needed.