Non Qualified Deferred Compensation is a generic and comprehensive term used to describe a broad array of employee benefit programs designed for the "Top Hat" group of employees in an organization.

"Top Hat" refers to an exemption in ERISA that allows an employer to offer benefits on a discriminatory basis to certain employees in the "Top Hat" group. This group includes employees who own 5% or more of the company; who are considered "Highly Compensated" by the IRS per formula for a given year ($95,000 annual earned compensation for 2003), or who are deemed "key employees" by management due to their duties and responsibilities, and have influence over the operation of the company and adoption of benefit programs.

Plan Design

A Non Qualified Deferred Compensation Plan (NQDC) can be designed as either a "Defined Benefit" or "Defined Contribution" program.

Under the "Defined Benefit" approach, the program is designed so that the employee is paid a fixed amount at some future date (example: $5,000 per month beginning at age 65, continuing 15 years).

Under the "Defined Contribution" approach, the program is designed with the employee and/or employer contributing a specified amount to the Plan (which may be changed in the future). Plan contributions and earnings accumulate to some future sum, at which point the employee may make withdrawals (similar in design to a 401(k) Plan).

Under either approach, the employer has broad discretion in Plan Design, including:

• Eligibility & Participation Requirements
• Vesting Schedule
• Provision for In-Service Withdrawals (If Any)
• Provision for Payout at Retirement (Lump Sum; Periods Available, etc.)
• Early Withdrawal Penalties (often called "Haircut" provisions)
• Plan Financing
• Employer and/or Employee Contribution Rates
• Provision for Plan Termination

A NQDC Plan may be funded with voluntary employee contributions (salary reductions similar to a 401(k) Plan); employer contributions, or a combination of both.

Benefits to the Employer

Allows the "Top Hat" Group to make up lost deferral opportunities due to restrictions and limits on the amount that may be deferred into a 401(k) Plan, and/or compensation considered for a Defined-Benefit Pension Plan.

Provides an added means for the employer to recruit, reward, and retain key employees.

May allow employer to reduce Insurance Expenses by eliminating life insurance used to fund Business Continuation Plans, Buy/Sell Agreements, or Lines of Credit, and using this coverage to informally finance a NQDC Plan.

Plan Assets are Employer-Assets and may enhance employer's financial statements.

Benefits to Employees

Allows Highly Compensated Employees to voluntarily defer up to 100% of their annual compensation, reducing current taxable income and saving additional sums for retirement on a tax-deferred basis.

Makes up for lost deferral opportunities due to limits on compensation that may be included in determining defined benefit pension benefits, and voluntary deferral percentages in 401(k) Plans.

Provides supplemental Retirement Benefits.

May include supplemental life insurance benefits, at employer's discretion.

Corporate Owned Life Insurance

The primary funding vehicle used for Non Qualified Deferred Compensation plans is Life Insurance owned by the corporation, also known as COLI.

For a FREE copy of our Corporate Owned Life Insurance planning guide, click here or the Request FREE Information Kit link at the top of each page on this site. It is your turn key guide to setting up your Non Qualified Deferred Compensation plan funded with Corporate Owned Life Insurance.