A&M Tax Advisor Weekly

The Increased Value of the Nonqualified Deferred Compensation Plan

Brennan Rittenhouse, Managing Director

brittenhouse@alvarezandmarsal.com

James Deverna, Senior Associate

September 24, 2018 / North America

On December 22, 2017, President Trump signed into law the Tax Cuts and Jobs Act of 2017 (TCJA), bringing about the most sweeping changes to the Internal Revenue Code since 1986. Total rewards professionals are now reconsidering the value of various compensation vehicles and employee benefits programs. In the wake of President Trump’s signature tax reform, nonqualified deferred compensation (NQDC) plans, which have long provided businesses a competitive advantage in attracting and retaining high-level performers, look even more attractive for many businesses. Savvy business leaders are increasingly taking advantage of the new tax landscape and making NQDC plans a part of their total rewards strategy.

What is an NQDC Plan and What is the Tax Treatment?

Like a more traditional qualified retirement plan (e.g., a 401(k) plan), an NQDC plan is a program that allows employees to earn compensation in one year but not recognize the income – and not pay income tax – until a designated time in the future when the compensation is distributed from the plan. Similar to a qualified retirement plan, an NQDC plan allows deferred compensation to grow, tax-deferred, until the compensation is later paid to the participant.

Qualified Retirement Plan vs. NQDC Plan

Qualified retirement plans provide sponsoring employers and participating employees with very beneficial tax treatment. Employees that defer compensation to an employer-sponsored qualified plan do not pay income taxes on their contributions and are generally only taxed later when they receive a distribution. Additionally, employers can take an immediate tax deduction at the time the employees make their deferrals. To receive this beneficial treatment, qualified retirement plans must comply with a litany of rules that, among other things, require the plan to benefit a large portion of the employee population and limit the amount that employees can defer into the plan in a given year.

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North America