What is Non-Qualified Deferred Compensation (NQDC)?

Non-Qualified – not qualified (no immediate tax deferral) under the Internal Revenue Code or Employee Retirement Income Security Act (ERISA)

Deferred Compensation – deferred long term bonuses or payouts

NQDC Plans can either be funded (monies immediately set aside) or non-funded (promise to pay in the future).

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Design Features of a NQDC Plan

• Flexible plans designed to pay participants at a specified time in the future
• NQDC plans may take various forms, but must meet certain IRS restrictions
• Sometimes referred to as Supplemental Executive Retirement Plan (SERP) or “Top Hat” plans
• Offered only to selective employees

Advantages of NQDC Plans

• Extremely flexible
• No requirement to divulge financial information to participants
• No caps on contributions
• Excellent recruiting and retention tool
• Inexpensive to set up and administer
• Coordinates well with other executive compensation programs
• Can layer NQDC Plans on top of or in lieu of a Qualified Plan (401k, Profit Sharing Plan, etc …)

Advantages and Attraction of NQDC Plans to Smaller Firms

• Requires little cash to implement
• Many firms/executives maxing out 401k plans
• Helps recruit, retain, and reward key employees
• Fast Implementation:  design and implement a prototype NQDC plan in under a month

Disadvantages of NQDC Plans

• Monies subject to creditors until exercised
• Interest on Deferred monies subject to taxation for employer
• Monies taxable as current income to the participant if they have “conditional receipt” of those funds
• Strict IRS codes apply with certain NQDC vehicles*

*Please note, all concepts, strategies, and products mentioned may not be suitable for you or your company. Information provided is not intended to be legal or tax advice. For NQDC Plans, among others, IRS Code 409(a), 457(b) and 457(f) regulations may apply.  Please consult with your tax and legal advisor for specific tax questions.