What are the NQDC retirement plans types?

There are many forms of NQDC retirement plans, but they all fall into one of two general categories: Deferral NQDC Plans and Supplemental NQDC Plans.

Deferral NQDC plans

In a Deferral NQDC Plan the employee enters into an agreement with the employer to defer a percentage of future compensation, a bonus, or commissions in return for a payment or a series of payments in the future (typically at retirement). Future payments are tied to the performance of one or a combination of investment choices. Many of these plans are designed to kick in at the point where the contribution limitations to the 401k plan are reached, and may also provide for matching contributions by the employer. These plans are often referred to as 401k mirror or 401k excess plans.

Supplemental NQDC plans

Supplemental NQDC Plans are essentially fringe benefit plans for key employees. The selected employees do not contribute to an excess plan. A typical supplemental plan is the Supplemental Executive Retirement Plan (SERP). SERPs or SERP plans are designed to restore defined benefit plan income lost as a result of benefit limitations imposed by the IRS.

Unlike in qualified plans, in a non-qualified plan the employer is not required by law to set any funds aside to fund future benefits. Many employers, though, choose to set funds aside to fund the future liability created by these plans. It is important to note that any funds the employer sets aside remain subject to claims of the employer’s creditors; the employee does not have any direct interest these funds. Special types of trusts often referred to as “Rabbi” trusts may be used to hold the funds, but the purpose of these trusts is limited to alleviating fears that in the event of a change in corporate management the company may choose not to pay the employees their deferred amounts. Funds in a “rabbi trust” are still subject to corporate creditors.

There is no income tax deduction for the employer or recognition of income by the employee when the plan is set up or when the employer sets money aside to fund future liabilities of the plan. Income tax deductions are available to the employer when benefits are actually paid to the employee or when funds in the plan become vested to the employee. This coincides with the recognition of taxable income by the employee. Income, including dividends, interest, and capital gains, generated as a result of informally funding the obligations are currently taxable to the employer.