Are non-qualified deferred compensation plans a good idea?

NQDC plans have the potential for tax-deferred growth, but they also come with substantial risks, including the risk of complete loss of the assets in your NQDC plan. We strongly recommend that executives review their NQDC opportunity with their tax and financial advisors.

Is nonqualified deferred compensation considered income?

Distributions to employees from nonqualified deferred compensation plans are considered wages subject to income tax upon distribution. Since nonqualified distributions are subject to income taxes, these amounts should be included in amounts reported on Form W-2 in Box 1, Wages, Tips, and Other Compensation.

How does a nonqualified deferred compensation plan work?

A nonqualified deferred compensation plan is a type of retirement plan that lets select, highly compensated employees enjoy tax advantages by deferring a greater percentage of their compensation (and current income taxes) than is allowed by the IRS in a qualified retirement plan.

What is the difference between a qualified and non-qualified deferred compensation plan?

Qualified plans allow employees to put their money into a trust that’s separate from your business’ assets. An example would be 401(k) plans. Nonqualified deferred compensation plans let your employees put a portion of their pay into a permanent trust, where it grows tax deferred.

What are the disadvantages of deferred compensation?

List of the Cons of a Deferred Compensation Plan 1. Your wages run a substantial risk of forfeiture under a deferred compensation plan. 2. Once you decide to use this option, then it cannot be changed. 3. You may still have your wages taxed at the highest rate.

What is NQDC tax?

A nonqualified deferred compensation (NQDC) plan is a broad, general description for any arrangement under which the employer or the employee can defer taxation of compensation that is earned in one year so that it becomes included in taxable compensation in a later year (because payment occurs more than 2 ½ months after the year in which the

Is deferred compensation considered wages?

Deferred compensation is a part of the salary, wage or compensation which is to be paid to the employee after some time. Deferred compensation denotes that the compensation is deferred by a certain time. This is usually practiced to defer tax to a future date when the rate is lower.

What are the benefits of a deferred compensation plan?

Benefits of a deferred compensation plan, whether qualified or not, include tax savings, the realization of capital gains, and preretirement distributions.

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