The most basic description of non-qualified deferred compensation is that it is an arrangement whereby the employer provides for a deferred benefit in the form of compensation to begin at the retirement of the recipient employee. Such benefit is not subject to the numerous requirements of tax-qualified plans under the internal revenue code such as non-discrimination, vesting, coverage, funding, disclosure, distribution and reporting.

The plan's non-qualified status makes it an oft utilized tool by employers to benefit and, in consequence, retain select key employees within an organization. This section discusses the basic features of non-qualified deferred compensation, how such arrangements differ from their tax-qualified counterparts, the basic types of non-qualified plans and their application, their income tax provisions, funding methodology and strategy. Because of the wide berth that such arrangements afford the plan design process, the depth of their treatment could be substantial. For the purposes of the CFP® examination, a basic foundation is required as to definition, terminology, operation, tax provisions and application.


After reading this section, you should be able to:

  • list and describes the basic features of a non-qualified deferred compensation plan.
  • discuss how such plans differ from qualified plans.
  • discuss the basic types of non-qualified deferred compensation plans and their application.
  • discuss the income tax implications of such arrangements, including: constructive receipt, substantial risk of forfeiture and the economic benefit doctrine.
  • discuss the ways to fund such plans and the advantages and disadvantages of each.
  • discuss some of the more commonplace strategies that utilize non-qualified deferred compensation plans.


Cash and Equivalents

Related Articles
  1. Managing Wealth

    Benefits of Deferred Compensation Plans

    Understand the difference between a qualifying or nonqualifying deferred compensation plan. Learn about the benefits of a deferred compensation plan.
  2. Retirement

    Deferred Compensation Plans Vs. 401(k)s

    Discover the major advantages and disadvantages offered by deferred compensation plans for retirement as compared to a 401(k) plan.
  3. Retirement

    Comparing Qualified And Non-Qualified Plans

    Qualified and non-qualified retirement plans are created by employers to benefit their employees.
  4. Managing Wealth

    Pros and Cons of Deferred Compensation Plans

    Learn about the pros and cons of non-qualified deferred compensation (NQDC) plans, including the flexibility of non-ERISA plans and the potential for forfeiture.
  5. Taxes

    How are Qualified and Nonqualified Dividends Taxed?

    Dividends are taxed differently based on if they are qualified or nonqualified.
  6. Managing Wealth

    Deferred Compensation Plans for Nonprofits

    Learn about the two types of deferred compensation plans that nonprofit companies can use to allow high-ranking employees to increase their retirement savings.
  7. Retirement

    The Basics of a 401(k) Retirement Plan

    This plan has become one of the most popular retirement options. Here's why.
  8. Financial Advisor

    Life Insurance Plans to Help Your Small Business Retain Employees

    How to use and design cash value life insurance plans as an incentive to help attract and retain key employees.
  9. Financial Advisor

    Maximize the Tax Benefit from Your Annuity

    Understand how nonqualified annuities are taxed during your lifetime, and how they are taxed when passed on to your beneficiaries.
Frequently Asked Questions
  1. Where else can I save for retirement after I max out my Roth IRA?

    The first option to explore is to determine if you can contribute to a 401(k), 403(b), or 457 plan at work. If your employer ...
  2. How did George Soros "break the Bank of England"?

    In Britain, Black Wednesday (September 16, 1992) is known as the day that speculators broke the pound. They didn't actually ...
  3. What counts as "debts" and "income" when calculating my debt-to-income (DTI) ratio?

    It's important to know your debt-to-income ratio because it's the figure lenders use to measure your ability to repay the ...
  4. Who are Monsanto's main competitors?

    Learn about Monsanto Company's two main operating divisions and its main competitors within each sector, including The Mosaic ...
Trading Center