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. Retirement

    How Non-Qualified Deferred Compensation Plans Work

    These tax-advantaged retirement savings plans have their pros and cons, and employers and employees must follow strict guidelines.
  2. Personal Finance

    Executive Deferred Comp: Understanding NQDC

    Non-qualifying deferred compensation offers benefits and risks for the execs who are eligible.
  3. Taxes

    How Non-Qualified Deferred Compensation Is Taxed

    The tax savings of non-qualified deferred compensation plans are not the only tax fact you need to know before signing up for one.
  4. 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.
  5. Retirement

    Comparing Qualified And Non-Qualified Plans

    Qualified and non-qualified retirement plans are created by employers to benefit their employees.
  6. Financial Advisor

    4 Compensation Plans for Wealthy Earners

    Here's what advisors need to know about non-qualified deferred compensation plans.
  7. Retirement

    Non-Qualified Deferred Compensation Plan Vs. 401(k)

    What's are the key differences between these two retirement savings plans?
  8. Taxes

    How are Qualified and Nonqualified Dividends Taxed?

    Dividends are taxed differently based on if they are qualified or nonqualified.
  9. Retirement

    5 Lesser-Known Retirement And Benefit Plans

    These plans aren't widely used, but they fill a specific niche for employees in certain situations.
  10. 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. How did the ABX index behave during the 2008 subprime mortgage crisis?

    Read about the disastrous performance of the various ABX indexes in the subprime mortgage crisis of 2008 during the middle ...
  2. How did moral hazard contribute to the 2008 financial crisis?

    Learn about moral hazard, how it can affect outcomes and how it contributed to the conditions that led to the 2008 financial ...
  3. Which mutual funds made money in 2008?

    Read about the only mutual fund that turned a profit in 2008. Learn about risk-averse investment strategies and the financial ...
  4. Were Collateralized Debt Obligations (CDO) Responsible for the 2008 Financial Crisis?

    Collateralized debt obligations are exotic financial instruments that can be difficult to understand, Learn the role they ...
Trading Center