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Non-Qualified Deferred Compensation Plan

How can your company give you, a key employee an opportunity to contribute more dollars on a pretax basis? Through a non-qualified deferred compensation plan (agreement). There are two types of nonqualified deferred compensation agreements: elective and non-elective.

A nonqualified deferred compensation plan is a contractual agreement in which you (an executive or key employee, or independent contractor) agree to be paid in a future year for services rendered.

These plans are geared toward anticipated retirement in order to provide cash payments to you when you retire, and to defer taxation to a year when you are in a lower bracket. Although your employer’s contractual obligation to pay the benefit is typically unsecured, the obligation still constitutes a contractual promise.

To obtain this flexibility both your employer and you must give something up. Your employer loses the up-front tax deduction for the contribution to the plan; however, they will get a deduction when benefits are paid.

You lose the security provided under ERISA. However, this concern is mitigated if you are the owner of the business. There are techniques available to provide the non-owner employee with a measure of security.

Deferred compensation payments usually start upon termination of employment or retirement, or pre-retirement death or disability. The most commonly used funding vehicle for non-qualified plans is corporate owned life insurance. For that reason, if you are a highly compensated employee and participate in this plan, you may also receive pre/ post-retirement death benefits.

Note: Non-Qualified Deferred Compensation plans are also called Supplemental Executive Retirement Plans (SERP) or Excess Benefit Plans among other names.