NQDC plans have the potential for tax-deferred growth, but they also come with substantial risks, including the risk of complete loss of the assets in your NQDC plan. We strongly recommend that executives review their NQDC opportunity with their tax and financial advisors.
What is an NQDC plan?
With a nonqualified deferred compensation (NQDC) plan, your employees can defer some of their pay until a later date. This type of deferred compensation plan typically pays out income after an employee leaves their job, like in retirement, for instance.
Can you roll over deferred compensation plan?
If you leave your company or retire early, funds in a Section 409A deferred compensation plan aren’t portable. They can’t be transferred or rolled over into an IRA or new employer plan. Unlike many other employer retirement plans, you can’t take a loan against a Section 409A deferred compensation plan.
What’s the difference between a NQDC and a 401k?
While there are rules regarding NQDC plans, the guidelines these plans are subject to aren’t as strict. Another key difference between the two kinds of plans is the fact that qualified deferred compensation plans have income caps. For example, a 401 (k) is a qualified deferred compensation plan.
Which is an example of a NQDC plan?
Examples of NQDC Plans. Nonqualified deferred compensation plans refer to supplemental executive retirement plans (SERPs), voluntary deferral plans, wraparound 401(k) plans, excess benefit plans and equity arrangements, bonus plans and severance pay plans.
Is the income from a NQDC plan taxable?
NQDC plans that are not subject to the creditors of the employer will be considered income to the employee, and thus taxable. If the employee has any beneficial interest in the assets, such as being able to use the assets as collateral for a loan, then the assets are includible in the income for the employee.
How does the NQDC deferred compensation plan work?
The NQDC plan can allow for a subsequent deferral or a change in election (e.g., to receive deferred compensation at age 70 rather than at age 65) only under certain conditions.
