Common Types of Executive Deferred Compensation Plans


Most people are familiar with the traditional approaches to executives funding their own retirements. But when an organization thinks about supplementing the retirement benefits of an executive, one of the best tools is the non-qualified executive deferred compensation plans or NQDC.

An executive deferred compensation plan gives the employer a way of putting off a guaranteed supplemental amount of the executive’s earnings for a later date, normally after retirement. Most NQDCs also include the provision of paying benefits early, such as when the executive becomes disabled or dies prematurely.

The deferred compensation plan does not create an additional tax burden for the employee because the compensation may not come for many years. And a deferred compensation plan is a powerful tool for ensuring that a key employee will remain with the company until retirement, rather than leaving to go to a competitor, and thereby forfeiting the future payments.

As with any future “promise to pay,” a plan has to be followed in order to ensure that those funds are available when needed. Typically, this is accomplished by the organization’s establishment of a reserve fund and an appropriate investment strategy. And in the event that the funds are needed early, the whole program is backed by life insurance.

Life insurance is the key component in making a non-qualified executive deferred compensation plan work without the employer having to put up all of the necessary funds at the outset. And that’s because life insurance is so practical and so economical. By design, it can provide the needed funds at any point in the program.

READ Related Article:  Buy-Sell Agreements in Estate Plans Can Meet Asset Protection, Estate Management, and Tax Deduction Needs

Please call (877) 972-3262 or contact us for the Exclusive Deferred Compensation Whitepaper now. This comprehensive whitepaper will provide every detail you need to know about executive deferred compensation arrangements.

Common Types of Executive Deferred Compensation Plans

There are two general types of executive deferred compensation plans:

  1. Top-hat plans and
  2. Deferred savings plans.

Top-hat plans are generally paid by employers, while deferred savings plans are based on the amount of compensation deferred by each employee. Under these general categories are several sub-types: salary reduction arrangements, bonus deferral plans, supplemental executive retirement plans (SERPs), and excess benefit plans. Phantom stock plans are also a type of NQDC plan.

With salary reduction arrangements and bonus deferral plans, employees defer a portion of their own earnings, so these plans are much like defined contribution plans. SERPs and excess benefit plans are funded by employers to provide a defined benefit in retirement, so they are equivalent to defined benefit plans.

Although top-hat plans are generally unfunded, the employee may choose a return based on the options provided by the plan. Unfunded plans have no money in them, so earnings are what the employer simply agrees to pay based on what would have been earned if the money was actually invested in the directed way.

NQDC plans are future obligations of the employer, so employers must decide how to finance the obligations. Some pay the obligations out of operational funds as they become due; some employers may use a sinking fund, making annual contributions to the fund and investing the money as it chooses; other employers use life insurance products to meet their obligation.

READ Related Article:  Are Bonuses Tax Deductible?

A Non-qualified Executive Deferred Compensation (NDQC) arrangement is relatively easy to set up and administer but you require experienced advisers to establish and manage for you. We have set up and are managing thousands of Split Dollar, Deferred Compensation, Defined Benefit and other Executive Bonus Plans across the country for last 17 years for sole proprietorship to large corporations. Please call (877) 972-3262 or contact us for the further information.


Leave a Reply