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Nonqualified Deferred Compensation: The Basics

For your company, NQDC can be a powerful financial tool to recruit, retain, and reward executives and key employees, a priority for all businesses. For you, it provides a financial-planning opportunity to defer taxable income until you need it, whether to pay for college, retirement, or other life events, or merely when you expect your tax rates will be lower.



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Key Points in This Article
In its simplest form, nonqualified deferred compensation is merely your company's unsecured, unfunded promise to pay you a stated dollar amount at some point in the future.
The NQDC plan usually lets you periodically elect, often on an annual basis, to defer current compensation to a future year. If properly arranged, the deferral means you do not pay ordinary income tax on the compensation until the payout.
It is the tax deferral, plus the ability for the full amount of your compensation to grow tax-free through investment, that makes NQDC attractive.