Nonqualified Deferred Compensation Plans ― What’s All the Hype and Why Does My Company Need One?

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At first glance, nonqualified deferred compensation (“NQDC”) plans may seem complicated and intimidating. It’s true ― there are complicated rules that need to be followed. However, NQDC plans are actually fairly simple to implement with the assistance of an employee benefits attorney.


Employers Can Benefit From NQDC Plans

NQDC plans can benefit employers in many ways, such as:

  • NQDC plans can help attract and retain key employees by providing additional benefit incentives and awards for both performance and length of service.
  • NQDC plans can help facilitate business succession planning by providing additional ownership interest in the company over time for key employees.
  • NQDC plans can provide a mechanism to defer taxes in later years.
  • NQDC plans allow employees to defer amounts greater than those deferred under a qualified deferred compensation plan, leading to a higher level of retirement savings.
  • NQDC plans allow for employers to plan for changes in control events and related payment parameters.

NQDC Structure And Compliance

As long as the applicable NQDC plan rules are complied with, there are numerous ways to structure NQDC plans and related payments. Each NQDC plan can be completely customized for the employer’s current needs and goals, as well as future needs and goals.

In addition, NQDC plans are exempt from most Employee Requirement Income Security Act (“ERISA”) requirements and related reporting requirements. This means there are no limitations on the amounts that can be deferred and no minimum distribution rules. In addition, NQDC plans can discriminate in favor of highly compensated employees and amongst employees in various compensation levels, which is largely impermissible for qualified plans.

The key for employers to take into account is that NQDC plans must comply with the rules of Internal Revenue Code (“IRC”) Section 409A, which are fairly simple to navigate with the assistance of an experienced employee benefits attorney.

This article has been prepared for general information purposes and (1) does not create or constitute an attorney-client relationship, (2) is not intended as a solicitation, (3) is not intended to convey or constitute legal advice, and (4) is not a substitute for obtaining legal advice from a qualified attorney. Always seek professional counsel prior to taking action.

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