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What is Non-Qualified Deferred Compensation?
Non-qualified deferred compensation (NQDC) is a type of retirement contribution that is earned by the employee but not yet paid by the employer. It is not counted in taxable income, as the compensation (monetary or otherwise) is earned but not received by the employee.
A Little More on What is Non-Qualified Deferred Compensation
The non-qualified deferred compensation plan is created to allow the employees with high income to defer compensation that they have a legally binding right to receive. The upper-limits imposed on employee contribution to the retirement savings plans put restrictions on the contribution of the high salaried employees in their tax-deferred retirement savings. The non-qualified deferred compensation plan enables them to avoid income taxes on the earnings and enjoy the tax-deferred investment growth. They do not have to pay taxes on that earnings when deposited, as the transfer of ownership is deferred.
For example, Christina’s annual income is $900,000. According to US law, her maximum 401(k) contribution should be less than 2.5% of her annual income. So, her contribution should not cross $22,500. This rule makes it difficult for her to save enough in her retirement account to support her in retirement. The non-qualified deferred compensation will enable her to avoid paying income tax on her earning and save a higher percentage of her income in her retirement savings.
The terms of the NQDC may vary by employer, it is often deferred up to 5 to 10 years or untill the retirement of the employee. The NQDCs are not restricted like the retirement plans and the employees can use the funds for fulfilling other savings goals.
However, the earning of NQDC is not protected under the Employee Retirement Income Security Act. If the employer company declares bankruptcy or it faces legal action by the creditors, the NQDC would not be protected. The company’s creditors may access this fund to get back what is owed by the company.
The fund received NQDC cannot be rolled over into an IRA or other retirement accounts. Another disadvantage of NQDC is the tax on the fund is calculated according to the prevailing tax rate at the time of the access and if that rate is higher than the time it was earned the employee needs to pay a higher rate on the income.
References for Non-Qualified Deferred Compensation
Academic Research on Non-qualified Deferred Compensation (NQDC)
Non-Qualified Deferred Compensation Plans, Durkin Jr, E. (1960). U. Cin. L. Rev., 29, 68. According to this paper, the non-qualified compensation plan that was later deferred was considered and studied. Also, the involvement of this plan with the economy was also explained in this research paper.
Deferred Compensation Plans: Qualifying for Non-Qualified Treatment, Neal, J. F. (1959). Vand. L. Rev., 13, 461. This paper explains the rules and processes involved in qualifying for the non-qualified treatments as long as the deferred compensation plan is in question. The following steps to take were annotated in this research paper.
Taxation of Non–Qualified Deferred Compensation Plans, Weinberg, R. S. (1963). Ky. LJ, 52, 750. As it is known that nothing good inasmuch as technology and innovation are concerned comes on a platter of gold. This paper, however, explains the importance of tax and taxation in the implementation of the deferred compensation plan. Hence, the taxation of the non-qualified deferred compensation plan was studied in this paper.
ERISA Aspects of Non–Qualified Deferred Compensation Arrangements, Snarr, B. B. (1994). Compensation & Benefits Review, 26(5), 5-7. This research paper explains the aspect of the ERISA on the non-qualified deferred compensation plan. The ERISA, however, does have effects on these plans and these effects were explained in this study.
Non-Qualified Deferred Compensation after Tax Reform, Millerick, R. S., & Neilson, W. A. (1988). Suffolk UL Rev., 22, 43. This study takes into account the actions of the non-qualified deferred compensation arrangement after the reform that took place in the tax and taxation sector of the economy. In this study, an economy was chosen as an example to explain this analysis maximally.
Coping with the Strict New Rules on Non–Qualified Deferred Compensation, Dondershine, S. (2006). This research paper explains the method of coping with the strict and just propounded rules as regards the non-qualified deferred compensation. In this study, several laid down rules were given and the reason for each rule was also explained as well as the various penalty and implications involved in not playing by these rules.
Current Issues in Non–Qualified Deferred Compensation, Teasley, D. R. (1985). Colo. Law., 14, 1606. This research paper explains the most current problem facing non-qualified deferred compensation rules. Even with the adoption of rules and imposing taxes, several problems still affect the NQDC (non-qualified deferred compensation).
Non-Qualified Deferred Compensation Plans: An Increasingly Critical Component of “Cutting Edge” Employee Compensation, Tomanek, M. L. (2016). According to this research thesis, the non-qualified deferred compensation plan was studied as an increasingly critical component of the cutting-edge employee’s compensation.
Use Of Life Insurance In Non–Qualified Deferred Compensation Plans, Brkich, S. T., & Goldstein, M. G. (2007). ALI-ABA Est. Plan. Course Materials J., 13, 5. In this study, various use of life insurance as regards the non-qualified deferred compensation plans were considered. This study explains the advantages of life insurance to the non-qualified deferred compensation agreements.
Special report on taxation. New tax rules affect non–qualified deferred compensation arrangements of tax-exempt organizations., Hoffman, S. F. (1988). Health care law newsletter, 3(1), 11. This study takes into consideration important field reports on taxation as well as the new tax rules imposed on the non-qualified deferred compensation rules and how these rules affect them. This study employed the use of the arrangements of the tax-exempted organization as a yardstick.
Nonqualified Deferred Compensation: A Critical Look, Leimberg, S. R., & McFadden, J. J. (1990). Journal of Financial Service Professionals, 44(3), 32. A critical look was adopted in this paper to study the use and importance as well as the general scope of the non-qualified deferred compensation rule.