A Powerful Tool, Often Underutilized
Nonqualified deferred compensation plans allow participants to set aside a portion of their salary, bonus, or other compensation before taxes are due, and let those dollars grow on a tax-deferred basis. For executives who have maximized their 401(k) and other qualified plan contributions, this can be one of the most impactful financial planning tools.
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Reduce Taxable Income
Deferring compensation reduces an employee's current year taxable income. For those who expect to be in a lower tax bracket at the time of the distribution, the long-term savings can be significant.
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Tax-Deferred Growth
Deferred account balances grow without being reduced by annual taxes on investment gains. Over time, that compounding advantage can meaningfully outpace a comparable taxable account.
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Save Beyond Qualified Plan Limits
401(k) and other qualified plans limit contributions annually. NQDC plans have no IRS contribution limits, allowing you to defer as much as your employer's plan allows.
Freedom To Choose
NQDC plans must follow rules set forth by Section 409A of the Internal Revenue Code.
Education and Guidance
Understanding plan options is the first step to using them well. KBA's dedicated service teams offer one-on-one counseling to participants to help them make informed decisions.
Deferral Amount Flexibility
Participants can choose how much of their eligible compensation to defer each year, within your plan's guidelines. You can adjust your elections annually during the enrollment period.
Investment Options
Many KBA-administered plans offer a range of investment crediting options, giving participants the ability to align their deferrals with their own investment objectives.
Distribution Scheduling
Participants can elect when and how they receive their distributions, whether at retirement, at a specified future date, or upon certain life events, within the parameters their plan allows.
Common Concerns Among Eligible Employees
These are the questions KBA hears most often from plan participants. Your plan may have specific provisions that differ, so always check with your plan administrator or the KBA service team for details.
The right amount depends on your income, tax situation, financial goals, and how much liquidity you need during the deferral period. Many participants find that deferring a meaningful portion of bonus compensation is an effective strategy, since bonus income is often irregular and easy to plan around. That said, your specific situation is unique, and we always recommend working with your personal financial advisor to determine the right amount for you. KBA's service team can help you understand your plan's options and mechanics.
For senior professionals who have already maximized their qualified plan contributions, NQDC plans can be among the most powerful financial planning tools available. The key factors to consider are your current versus expected future tax rate, your employer's financial stability (since NQDC balances are unsecured obligations of the company), and your personal liquidity needs. For many participants, the combination of current tax reduction and long-term tax-deferred growth makes participation well worth it.
Your distribution schedule is established during your annual enrollment period, in accordance with 409A rules. Most plans allow distributions to begin at retirement or separation from service, on a schedule you elected in advance. KBA administers these distributions and coordinates directly with you when the time comes. If you are approaching a transition and have questions about your specific plan, reach out to the KBA service team early so you have a clear picture of what to expect and when.
Deferral elections for future compensation can generally be changed during your plan's annual enrollment window. Distribution schedules, once set, are subject to 409A's strict timing rules and typically cannot be changed without a compliant delay. However, some plans offer additional flexibility for certain events. Your plan documents and the KBA service team are the best sources for what is available in your specific plan.
NQDC plan balances are notional accounts, meaning they track the performance of the investment options you select rather than being directly invested. Your plan likely offers a menu of investment crediting options. KBA administers the tracking and crediting of these elections and can help you understand the options available in your plan. For guidance on which options are right for your situation, we recommend working with your personal financial advisor.