Little known savings plans, often referred to as “Top Hat” plans, which are usually reserved for highly paid executives are making the wealth gap between them and workers even wider, writes Anne Tergesen for The Wall Street Journal.

The top five executives at the publicly traded companies in the S&P 500 index have a combined $8.9 billion in these plans, according to a report by two nonprofits, including the Institute for Policy Studies.

The CEO financial stockpiles are growing significantly thanks to these saving plans usually reserved for highly paid executives. Due to tax law, executives can defer up to 100 percent of their compensation without having to pay income tax on the funds until they are ready to withdraw them.

“People’s minds are blown when they see the wage gap between CEOs and workers,” said Sarah Anderson, of the Institute for Policy Studies. “But the gap between CEO and worker retirement benefits is so much wider.”

CEOs who use these plans, also known as non-qualified plans, usually withdraw the money after they retire. Similar to 401(k) plans, they allow eligible employees to funnel their compensation into the plan without having to pay income tax. This allows them to profit from the tax-free compounding of any investment gains.

Top hat plans do not have caps under the law, but individual companies can set their own limits.

The aim of these plans is to provide highly paid executives with the chance to save enough to replace a sizable part of their preretirement income. Such high savings are often not possible to achieve with a 401(k) plan, since they have a cap of $22,500 per year on tax-advantaged contributions. That number is increased to $30,000 for workers 50 and older.

Fred Hubler, CEO and Chief Wealth Strategist at CCWMG and a Forbes.com contributor, assists clients in creating their own unique “top hat” plans. According to Hubler, “Employees who are not included in executive packages have the option to pursue similar alternative solutions.”

Hubler further explains that his approach involves strategies such as overfunding life insurance and utilizing tax credit investments to reduce taxable income and generate passive income.

Additionally, according to Hubler, employees can explore the possibility of an in-service distribution, which enables them to roll over funds tax-free from their current plan and invest in an IRA. This provides an opportunity to allocate investments beyond traditional stocks and bonds offered within the retirement plan.

Read more about top hat plans in The Wall Street Journal.

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