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Nonqualified Deferred Compensation Plans

Nonqualified deferred compensation plans (NQDC)

Unless you’re a top executive in the C-suite, you can pretty much forget about being offered an NQDC plan.

But we can wistfully check them out. Littell says there are two main types: One looks like a 401(k) plan with salary deferrals and a company match, the other is solely funded by the employer.

The catch is that most often the latter one is not really funded. The employer puts in writing a “mere promise to pay” and may make bookkeeping entries and set aside funds, but those funds are subject to claims by creditors.

Pros: The benefit is you can save money on a tax-deferred basis, but the employer can’t take a tax deduction for its contribution until you start paying income tax on withdrawals.

Cons: They don’t offer as much security. “There’s some risk that you won’t get your payments (from an NQDC plan) if the company has financial problems,” says Littell.

What it means to you: For executives with access to an NQDC plan in addition to a 401(k) plan, Littell’s advice is to max out the 401(k) contributions first. Then if the company is financially secure, contribute to the NQDC plan if it’s set up like a 401(k) with a match.

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