Focus on Nonqualified Deferred Compensation Plans

If certain executives are critical to the success of your business, providing them with a nonqualified deferred compensation (NQDC) plan could be an effective retention strategy. Such a plan represents an agreement whereby one person (or legal entity) promises to pay compensation at some time in the future. The plan is a contractual agreement between the employer and an employee, which specifies when and how future compensation will be paid.
When the plan is properly arranged, the employee defers taxation until benefits are actually paid. Because these plans are not governed by Federal pension laws, they are considered "nonqualified," and they can be extremely flexible. Their very flexibility—and the associated risks—means that professional guidance from tax, legal, and financial professionals is required. From a business standpoint, it is important to establish an informal funding mechanism to help ensure the benefits are available when the employee is entitled to them. From a tax standpoint, it is important to ensure that the employee's benefits are taxed upon receipt, and not before. Professional advice is advised to ensure compliance with all tax issues related to NQDC plans, including the Internal Revenue Service's "constructive receipt doctrine" and IRC Section 409A, the latter of which prescribes rules regarding the timing of deferral elections,
acceleration of benefits, and distribution of deferred amounts.