Non-qualified Deferred Compensation

A non-qualified deferred compensation plan or agreement simply defers the payment of a portion of the employee’s compensation to a future date.

The employee can defer regular salary, bonuses or any other type of compensation. Frequently the compensation deferred is additional (or supplemental) compensation provided by the employer to fund the arrangement.

A non-qualified deferred compensation plan can be established for one individual (for example, an agreement for one key 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).

The amounts are held back (deferred) while the employee is working for the company, and are paid out to the employee when he or she separates from service, becomes disabled, dies, etc.

One of the keys benefits of a non-qualified deferred compensation plan is that the employee will not be required to pay income tax on those deferred amounts until the amounts are actually paid to the employee.

Types of Non-qualified deferred Compensation Plans

There are two general types of unfunded deferred compensation plans:

Elective Deferral Plans
Under an elective deferral plan, the employee elects to defer a portion of compensation, which he or she would otherwise receive currently. The election is contained in a written agreement that specifies the amount of salary, bonus, commissions or other deferrals and the time and manner of payment, such as retirement.

Supplemental Benefit Plans
Under a supplemental benefit plan, the employer makes a legally binding agreement to pay "supplemental" compensation (compensation in addition to regular salary and bonus), typically upon retirement. These plans are often called Supplemental Employee Retirement Plans or "SERPs."