A nonqualified deferred compensation plan (NQDC) is an elective or non-elective plan, agreement, method, or arrangement between an employer and an employee to pay the employee compensation in the future.

The NQDC plan allows an employee to earn compensation (wages, bonuses or other forms of compensation) in one year, but receive the compensation in a later year, thus deferring income taxes until the compensation is received. Some nonqualified plans use after-tax dollars to fund them and, in most cases, employers cannot claim their contributions as a tax deduction. NQDC plans are most commonly used by highly paid executives who do not need the total of their annual compensation to live on and are looking to reduce their current tax burden. Since this type of plan is ‘nonqualified’ the deferred compensation or contributions are not shielded against creditors, bankruptcy, or liabilities. Qualified Plans such as 401(k), Profit Sharing, 403(b), Defined Benefit and Cash Balance plans are described in Section 401(a) of the Tax Code. Contributions (both employee pre-tax and employer) made into this type of retirement plan are not taxed until the employee withdraws money from the plan. Also, a Qualified Plan meets ERISA guidelines, while a nonqualified retirement plan falls outside of ERISA guidelines.

PPC plan consultants work with ERISA attorneys to help structure NQDC plans.