A nonqualified deferred compensation plan (NQDC) typically refers to an agreement in which an employee consents to receive a withheld portion of salary as payments at a later point in time. The employee can decide how much to defer each year from salary, bonuses or other forms of compensation. Income tax is not paid on that portion of compensation until the employee receives that income. The payments made by the employer are not tax-deductible and are not limited to caps imposed on qualified (ERISA compliant) defined contribution or defined benefit plans.
Deferred compensation plans are typically available to senior management and highly compensated employees when the contribution limits on 401(k) plans are not adequate for those higher earners. The primary goal of most NQDC plans is to recruit, reward and retain top executive talent.
Disadvantages: You can’t take loans from NQDC plans, and the money from NQDC plans can’t be rolled over into an IRA or other retirement account when the compensation is paid.