Non-Qualified Deferred Compensation – NQDC

Posted in Finance, Accounting and Economics Terms, Total Reads: 336
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Definition: Non-Qualified Deferred Compensation – NQDC

Non-Qualified Deferred Compensation or NQDC refers to the compensation that an employee has earned but is yet to receive it from his employer. The NQDC defers the payment of a part of the total compensation for the employee to a future date. It happens so because the ownership of the compensation may have not been transferred to the employee from the employer. This means it has yet not been recognized as a part of the income earned by the employee and hence is not accounted in the taxable income.


In general there are two types of such deferred compensation plans:

• Elective Deferral Plans

In the Elective Deferral Plan, it is the employee’s choice to defer a portion of his/her compensation, which he/she was supposed to receive currently.

• Supplemental Benefit Plans

The Supplemental Benefit Plan has a legal agreement made by the employer thus binding the employee to receive it usually after retirement.

The NQDCs have advantages for both the business that is providing them and the employees who are availing it.


Advantage to the Sponsoring Business:

• Unlike the retirement plans, the NQDCs are flexible and allow the employer to decide on which employees would participate in the NQDCs.

• It allows the employer to reward and retain employees who have proved to be vital for his business.

• The benefits are tax deductible when paid to the employees.

• Unlike the retirement plans, these NQDCs do not have much government reporting and hence can be tailored according to the organization’s flexibility.

• It can help to provide the employees the motivation thereby improving their individual performances and hence improving the efficiency of the organization.


Advantages to the Employees:

• Deferred payments allow the gross income of the employees to go down thereby lowering their taxable income.

• During retirement, when the benefits are received, if the employee falls in the lower tax bracket it can be used for effective tax leverage.

• With proper planning, NQDCs can help reduce the shortfall of the employees during his/her retirement.

• Due to their flexibility, the NQDCs can be tailored according to the requirements of the employee at any point in his/her life.

 

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