What is Non-Qualified Deferred Compensation?
 

What is Non-Qualified Deferred Compensation (NQDC)? There are two portions to the definition:

Non Qualified – not qualified under the Internal Revenue Code or Employee Retirement Income Security Act (ERISA).

Deferred Compensation – deferred long term bonuses.  

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

Design Features of a NQDC:

• 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 highly compensation or key employees. 

Advantages of NQDCs

• Extremely flexible. 
• No requirement to divulge financial information to participants. 
• No caps on contributions. 
• Excellent recruiting and retention tool. 
• Very inexpensive to set up and administer. 
• Coordinates well with other executive compensation programs 
• Many more options with a Non Qualified plan as compared to Qualified plans. 

Advantages and Attraction of NQDCs to smaller firms:

• Requires little cash to implement. 
• Many firms/executives maxing out 401k plans.   
• Helps recruit, retain, and reward key employees. 
• Design and implement a prototype NQDC plan in under a month. 
• Easy to manage. 
• Company gains interest on monies saved.
     

Disadvantages of NQDCs

• 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.