Non-Qualified Deferred Compensation (NQDC)

What Is a Non-Qualified Deferred Compensation (NQDC)?

A non-qualified deferred compensation will be compensation that has been earned by an employee yet not yet received from their employer. Since the ownership of the compensation — which might be monetary etc. — has not been moved to the employee, it isn't yet part of the employee's earned income and isn't considered taxable income.

Figuring out Non-Qualified Deferred Compensations (NQDCs)

NQDCs, frequently alluded to as 409A plans due to the section of the tax code they exist in, arose in response to the cap on employee contributions to government-sponsored retirement savings plans. Since high-income earners couldn't contribute similar proportional adds up to their tax-deferred retirement savings as different earners, NQDCs offer a way for high-income earners to concede the actual ownership of income and stay away from income taxes on their earnings while getting a charge out of tax-deferred investment growth.

For instance, if Sarah, an executive, earned $750,000 each year, her maximum 401(k) contribution of $19,500 would address just 2.6% of her annual earnings, making it trying to save sufficient in her retirement account to supplant her salary in retirement. By conceding a portion of her earnings to a NQDC, she could defer paying income taxes on her earnings, empowering her to save a higher percentage of her income than is suitable under her 401(k) plan.

Savings in a NQDC are frequently deferred for five or 10 years, or until the employee arrives at retirement.

NQDCs don't have similar limitations as retirement plans; an employee could involve their deferred income for different savings objectives, similar to travel or education expenses. Investment vehicles for NQDC contributions shift by employer and might be like the 401(k) investment options offered by a company.

Limitations of NQDCs

Be that as it may, NQDCs are not without risk; they're not protected by the Employee Retirement Income Security Act (ERISA) like 401(k)s and 403(b)s are. On the off chance that the company holding an employee's NQDC declared bankruptcy or was sued, the employee's assets wouldn't be protected from the company's creditors. Another important point is that the money from NQDCs can't be turned over into an IRA or other retirement accounts after they're paid out. That's what another consideration is assuming tax rates are higher when the employee gets to their NQDC than they were the point at which the employee earned the income, the employee's tax burden could increase.

NQDCs can be a significant savings vehicle for highly compensated workers who've exhausted their different savings options.