Nonqualified Deferred Compensation - Basics

Basics

In describing a "non-qualified deferred compensation plan", we can consider each word.

• Non-qualified: a "non-qualified" plan does not meet all of the technical requirements imposed on "qualified plans" (like pension and profit-sharing plans) under the IRC or the Employee Retirement Income Security Act (ERISA). However, they are required to meet the requirements of IRC § 409A.

• Deferred: the employee’s receipt of compensation is delayed until a future date (such as upon attaining normal retirement age).

• Compensation: the employee can defer regular salary, bonuses or any other type of compensation. Employees who are very high in the corporate hierarchy may receive additional (or supplemental) compensation provided by the employer to fund the arrangement.

• Plan: a non-qualified deferred compensation plan can be established for one individual (for example, an agreement for one employee), or can be established for a large number of individuals selected in the complete discretion of the company (for example, a "plan" for all the highly paid employees of the company). A non-qualified deferred compensation arrangement also can be established for an independent contractor, including directors.