Benefit Now, Pay Later

When companies offer employees deferred compensation in the form of “qualified” retirement plans, including 401(k) and SIMPLE plans, they offer tax-advantaged contributions and potential earnings. “Non-qualified” deferred compensation (NQDC) plans don’t typically include the same tax advantages, yet they help companies compete for and retain top employees.

BANG FOR THE BUCK
Companies use NQDC plans to help employees, typically those who are highly paid and most important, put more money away for retirement than allowed by qualified plans. While large companies historically have offered these plans, smaller firms are finding them useful, too.

STRUCTURE MATTERS
There are a few ways to structure these plans, which are governed by signed agreements between participating employees and employers. One way doesn’t involve extra compensation, but allows high-earning employees to defer part of their compensation in return for this money, plus interest, at a later date. Other plans may offer extra compensation or bonuses to valued employees, but only as deferred compensation.

Some agreements let employees put this money in company stock or different investments, while others are simply a promise by the employer to pay a certain amount at a later date. There are pros and cons to each approach, including the potential of investments or the company performing badly and jeopardizing deferred money.

TALK TO THE EXPERTS
NQDC is listed as a liability on the company’s ledger, so companies might consider buying life insurance or annuities for key employees, reducing their liability while keeping the benefit the same. Either way, the agreement can contractually obligate recipients to remain with the company for a set period of time to receive the deferred compensation.

Talk to your tax and legal professionals before entering into an NQDC agreement.