What is Nonqualified Deferred Compensation and Why Do Companies Use It?

What is Nonqualified Deferred Compensation and Why Do Companies Use It?

August 7, 2020

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Answering the question: “What is Nonqualified Deferred Compensation?”

A nonqualified deferred compensation plan (NQDC) is an unsecured promise made by an employer to pay compensation to key employees at a prespecified time in the future or upon the occurrence of a predetermined event. An NQDC plan is also one of the most powerful tools available to employers for recruiting, retaining, and rewarding key employees.

A Nonqualified Deferred Compensation Plan:

  • Helps organizations attract and keep key talent
  • Is an effective way to restore income deferral opportunity lost to qualified plan restrictions
  • Provides employees a valued and meaningful retirement savings and tax reduction strategy

Nonqualified plans are not required to comply with most terms of the Employee Retirement Income Security Act (ERISA). Instead, Internal Revenue Code Section 409A provides compliance guidelines for NQDC plans, inherently creating flexibility for creativity in plan design.

According to the 2019 Executive Benefit Survey conducted by Prudential/PLANSPONSOR, of the more than 200 mostly large, public, tax-paying C-corps* surveyed:

  • 91% of companies offer a nonqualified deferred compensation plan
  • 59% of plan sponsors informally fund their plan
  • 54% of plan sponsors fund with COLI while 41% fund with taxable mutual funds

Timing Matters

The election to defer compensation into an NQDC plan must occur before the compensation is earned. Also, rules for election timing vary depending upon whether the compensation earned is performance-based, base pay, or something else. NQDC plan participants must carefully consider the timing of the election to defer.

The timing and form of payout is also a matter for strategic planning. As plan language permits, participants may choose to defer their payouts to coincide with a milestone life event, such as a child’s college tuition or the executive’s own retirement.

Nonqualified Deferred Compensation and Corporate Stability

Employers as plan sponsors benefit from the opportunity to offer plans that further the objectives and goals of the company while concurrently rewarding key talent in ways that are valued and meaningful to highly compensated employees (HCEs).

While economic and political climates change, the demand for dedicated talent at the helm of America’s corporations remains a constant. When benefits are tied to long-term reward, executives can devote their time and talents to achieving their company’s big picture goals. Organizations benefit most when key employees can be focused on their role, with the distractions of personal financial concerns minimized.

#NQDC #FulcrumPartners #409A #deferredcompensation

* Based on Prudential/PLANSPONSOR’s description of survey group

This material has been prepared for informational purposes only, and is not intended to provide, and should not be relied on for, accounting, legal or tax advice. Any tax advice contained herein is of a general nature. You should seek specific advice from your tax professional before pursuing any idea contemplated herein.

Securities offered through Lion Street Financial, LLC (LSF) and Valmark Securities, Inc. (VSI), each a member of FINRA and SIPC. Investment advisory services offered through Lion Street Advisors, LLC (LSA) and Valmark Advisers, Inc. (VAI), each an SEC registered investment advisor. Please refer to your investment advisory agreement and the Form ADV disclosures provided to you for more information. VAI/VSI and LSF/LSA are non-affiliated entities and separate entities from OneDigital and Fulcrum Partners.

Unless otherwise noted, VAI/VSI, LSF/LSA are not affiliated, associated, authorized, endorsed by, or in any way officially connected with any other company, agency or government agency identified or referenced in this document.

Lion Street Advisors // Lion Street Financial

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