Nonqualified Deferred Comp Plans (NQDC) are great for Employee Recruiting and Retention

Key Points of this article:

  • As the war for top talent continues, we’re seeing higher demand for NQDC plans
  • What is a NQDC plan?
    • A plan for a select group of key employees that looks, feels, and breathes like a 401(k) plan, without all of the restrictions and limits of a 401(k) plan
  • Benefits:
    • Talent attraction and retention – NQDC plans are often referred to as “golden handcuffs”. Creative vesting schedules + extra tax advantaged compensation = retention
    • Significant tax advantages
    • Allows high earners to save above and beyond the $22,500 limit of a 401(k) plan

nonqualified deferred comp plan NQDCAn employer may choose to offer a non-qualified deferred compensation (NQDC) plan to employees for several reasons. While qualified retirement plans, such as 401(k)s, offer significant benefits, NQDC plans provide additional flexibility and advantages that can be appealing to both employers and employees.

Here are some reasons why an employer may opt to offer an NQDC plan:

  • Attract and Retain Top Talent: NQDC plans can serve as an attractive incentive for recruiting and retaining high-caliber employees. By offering additional retirement benefits beyond a traditional 401(k) or pension plan, employers can differentiate themselves in the competitive job market, making their compensation package more enticing to potential employees.
  • Customizable Benefit Structure: Unlike qualified plans, NQDC plans are not subject to the same strict IRS regulations regarding contribution limits and distribution requirements. This flexibility allows employers to design plans that cater to the specific needs and preferences of key employees. Employers can structure the plan to offer a variety of payout options, including lump sums, periodic installments, or deferred distributions during retirement.
  • Supplemental Retirement Savings: NQDC plans provide an opportunity for highly compensated employees to save additional funds for retirement beyond the limits imposed by qualified plans. Since qualified plans have annual contribution limits, high earners may find it challenging to save enough to meet their retirement goals. NQDC plans allow employees to defer a portion of their income, potentially leading to higher overall retirement savings.
  • Tax Deferral and Wealth Accumulation: One of the main advantages of NQDC plans is the ability to defer income taxes on contributions until the funds are distributed. This allows employees to potentially benefit from tax deferral and accumulate wealth over time. By deferring taxes, employees can take advantage of potentially lower tax rates during retirement, assuming their income decreases in retirement compared to their working years.
  • Executive Compensation and Retention: NQDC plans are often utilized as a component of executive compensation packages. By providing additional deferred compensation, employers can reward key executives for their performance and align their interests with the long-term success of the company. These plans can serve as a retention tool, as they typically include vesting schedules and penalties for early withdrawals, incentivizing executives to stay with the company.
  • Corporate Tax Deductions: Employers can benefit from tax deductions associated with funding NQDC plans. While the contributions made to qualified plans are generally tax-deductible for the employer, the tax treatment of NQDC plan contributions depends on the specific structure of the plan. Employers should consult with tax professionals to ensure compliance with tax laws and regulations.

It’s important to note that NQDC plans come with certain complexities and risks. Employers must carefully design and administer these plans to ensure compliance with legal requirements, including the Employee Retirement Income Security Act (ERISA). Additionally, employees should carefully evaluate the potential risks and rewards of participating in an NQDC plan, as the funds are subject to the general creditors of the employer until distribution.

In summary, offering an NQDC plan can provide employers with a competitive advantage in attracting and retaining top talent, offering customizable benefit structures, and allowing for supplemental retirement savings beyond the limits of qualified plans. Employees can benefit from tax deferral, increased retirement savings, and potential wealth accumulation. However, it’s essential to navigate the legal and administrative complexities associated with these plans to ensure compliance and mitigate potential risks.

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Disclosures, Sources, and Footnotes

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