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
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Managing WealthLearn about the pros and cons of non-qualified deferred compensation (NQDC) plans, including the flexibility of non-ERISA plans and the potential for forfeiture.
TaxesDividends are taxed differently based on if they are qualified or nonqualified.
Managing WealthLearn about the two types of deferred compensation plans that nonprofit companies can use to allow high-ranking employees to increase their retirement savings.
RetirementThis plan has become one of the most popular retirement options. Here's why.
Financial AdvisorHow to use and design cash value life insurance plans as an incentive to help attract and retain key employees.
Financial AdvisorUnderstand how nonqualified annuities are taxed during your lifetime, and how they are taxed when passed on to your beneficiaries.