Timing Your Company’s Nonqualified Deferred Compensation Plan

Companies provide different types of benefits to meet the interests and needs of their employees. One option to consider is a nonqualified deferred compensation (NQDC) plan. A NQDC allows employees to earn wages and other types of compensation over the course of one tax year then defer those earnings and income tax obligations to a later year. Common examples of deferred compensation plans are supplemental executive retirement plans and wraparound 401(k) plans. There are other voluntary deferral plans that can be useful as well, depending on your specific company needs.

Requirements for a NQDC Plan

Governed by the federal tax code, 409A plans (another name for NQDC plans) must be in writing. This writing must clearly specify details of the plan, from how much payment is deferred to what event will trigger eventual payment. Each employee enrolled in the plan must make the decision to defer his or her compensation in the tax year before the compensation is earned. Further, the amount deferred must be set aside and earn a reasonable rate of return. When the income is finally distributed, it includes both the deferred compensation and the earnings from investment.

Nonqualified deferred compensation plans are generally not covered under ERISA (some exceptions apply). This means that employers are not subject to the tax-qualified retirement plan nondiscrimination testing requirements and can therefore elect to offer these plans to the employees who would most benefit or just to key employees who are interested in the flexibility these plans offer. Many companies use NQDC plans as part of executive compensation. They often serve to sweeten the package for key staff or as an incentive to key employees. In both cases, NQDC plans are a valuable attraction and retention tool for key employees.

When is a NQDC Plan a Good Idea for My Business?

Your business may consider a NQDC plan for certain types of employees who are seasonal workers, but who need their compensation spread over the course of a full year. Perhaps you are looking for ways to incentivize executives and other key staff to stay with the company over a longer period. You may want to provide staff with an additional way to fund their retirement. Finally, your business may be considering the cash flow advantages of deferring compensation until the future.

Structuring a NQDC plan for your business would start with the team from Hall Benefits Law taking the time to understand your business and your goals for the plan. Then we work with you to legally-compliant, strategically-designed plan that facilitates attraction and retention of top employees. To learn more, call 678-439-6236 or visit the Hall Benefits Law website. Our team is based in Georgia, but we work with corporate clients throughout the United States to create, review, monitor, and protect employee benefit plans.

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