Non-qualified deferred compensation (NQDC) - How To Discuss

A type of retirement contribution that has been earned by an employee but not yet paid by the employer. Because the employee has not received the compensation it is not counted as taxable income (deferred). Non-qualified deferred compensation plans are often used to compensate employees with high salaries because of restrictions placed on contributions placed on standard pension plans and tax-qualified profit sharing plans. Non-qualified refers to this type of compensation not having the same income tax benefits that qualified retirement plans have. See also deferred compensation.

Non-Qualified Deferred Compensation is compensation that has been earned by an employee, but not yet received from their employer. Because the ownership of the compensation - which may be monetary or otherwise - has not been transferred to the employee, it is not yet part of the employee's earned income and is not counted as taxable income.

NQDCs, often referred to as 409A plans, due to the section of the tax code they exist in, emerged in response to the cap on employee contributions to government-sponsored retirement savings plans. Because high-income earners were unable to contribute the same proportional amounts to their tax-deferred retirement savings as other earners, NQDCs offer a way for high-income earners to defer the actual ownership of income and avoid income taxes on their earnings while enjoying tax-deferred investment growth.