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February 16, 2009

Non-Qualified Deferred Compensation ( NQDC)

Your Guide

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Definition

Any elective or nonelective plan agreement, method, or arrangement between an employer and an employee (or service recipient and service provider) to pay the employee compensation some time in the future.

Employers and employees do not receive the tax benefits that are available to qualified plans,

NQDC plans typically fall into four categories.

  1. Salary Reduction Arrangements  to defer the receipt of otherwise currently includible
    compensation by allowing the participant to defer receipt of a portion of his or her
    salary.
  2. Bonus Deferral Plans resemble salary reduction arrangements, except they enable participants to defer receipt of bonuses.
  3. Top-Hat Plans (aka Supplemental Executive Retirement Plans or SERPs) are NQDC plans maintained primarily for a select group of management or highly compensated
    employees.
  4. Excess Benefit Plans are NQDC plans that provide benefits solely to employees whose benefits under the employer’s qualified plan are limited by § 415.

Despite their name, phantom stock plans are NQDC arrangements, not stock arrangements.

Referring Cite

www.irs.gov, § 885 of the American Jobs Creation Act of 2004

Additional Helpful Information

    1. NQDC plans are either funded or unfunded, though most are intended to be unfunded because of the tax advantages unfunded plans afford participants.
    2. An unfunded arrangement is one where the employee has only the employer’s “mere promise to pay” the deferred compensation benefits in the future, and the promise is not secured in any way.
    3. A funded arrangement generally exists if assets are set aside from the claims of
      the employer’s creditors, for example in a trust or escrow account.
    4. NQDC plans may be formal or informal, and they need not be in writing.

Written By

Denise Appleby

Denise is CEO of Appleby Retirement Consulting Inc., a firm that provides IRA resources for financial/ tax/legal professionals. She has over 20 years of experience in the retirement plans field, which includes training and technical consultation.

Denise writes and publishes educational /marketing tools for advisors; available at http://irapublications.com. Denise co-authored several books on IRAs

Denise is a graduate of The John Marshall Law School, where she obtained a Masters of Jurisprudence in Employee Benefits, and has earned 5 professional retirement designations.
She has appeared on numerous media programs, sharing her insights on retirement tax laws.

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