If you’re an executive or other key employee, your employer may offer you a nonqualified deferred compensation (NQDC) plan. As the name suggests, NQDC plans pay employees in the future for services currently performed. The plans allow deferral of the income tax associated with the compensation.
But to receive this attractive tax treatment, NQDC plans must meet many requirements. One is that employees must make the deferral election before the year they perform the services for which the compensation is earned. So, if you wish to defer part of your 2019 compensation, you generally must make the election by the end of 2018.
NQDC plans vs. qualified plans
NQDC plans differ from qualified plans, such as 401(k)s, in that:
- NQDC plans can favor highly compensated employees,
- Although your income tax liability can be deferred, your employer can’t deduct the NQDC until you recognize it as income, and
- Any NQDC plan funding isn’t protected from your employer’s creditors.
While some rules are looser for NQDC plans, there are also many rules that apply to them that don’t apply to qualified plans.
2 more NQDC rules
In addition to the requirement that deferral elections be made before the start of the year, there are two […]