Deferred Compensation Plans
A Strategic Benefit for Executives and High Earners
How Nonqualified Deferred Compensation Works
A nonqualified deferred compensation (NQDC) plan allows selected executives to defer income beyond traditional 401(k) limits, creating powerful savings and tax advantages. These plans are designed for high earners who consistently max out their qualified plans and need additional strategies to build long-term wealth. For employers, deferred comp offers a flexible, cash-efficient way to reward and retain leadership—without mandatory annual contributions. Because funds generally vest or pay out only after certain events, they create strong “golden handcuff” incentives that align with long-term organizational goals. IFG helps companies design NQDC plans that balance executive needs, employer objectives, and strict compliance with Section 409A regulations.
Plan Design, Eligibility & 409A Compliance
Building a Custom Plan That Fits Your Leadership Structure
IFG works with employers to determine who should be eligible—typically a select group of management or highly compensated employees—to ensure the plan remains ERISA-exempt and properly structured. We guide clients through determining how much compensation can be deferred (e.g., portions of salary, bonuses, or commissions), whether the company wants to offer matches or interest credits, and which events will trigger distributions. Our consultants coordinate closely with tax and legal professionals to build a compliant plan document that adheres to strict 409A rules regarding election timing, funding vehicles, and payout structures. By managing these complexities, we help employers avoid costly penalties and ensure the plan supports both corporate strategy and executive financial planning.
Benefits for Employers and Executives
Why Deferred Compensation Enhances Recruitment & Retention
Deferred compensation plans offer meaningful benefits to both companies and their leadership teams. For employers, these plans help recruit, reward, and retain highly skilled executives who drive long-term success. They extend a benefit beyond the 401(k), signaling that the organization values its leadership and wants to support future financial security.
Key benefits include:
- Retention Power: Vesting schedules and payout timing encourage long-term commitment from key employees.
- Tax Efficiency: Executives reduce current taxable income while employers receive deductions when benefits are paid.
- Flexible Contributions: Employers can match deferrals or offer discretionary contributions without annual funding requirements.
- Strategic Cash Flow: Payments can be structured over multiple years to manage financial impact.
This combination makes deferred comp an essential tool for companies competing for top-tier talent.
Funding, Communication & Ongoing Plan Management
Ensuring Stability, Transparency & Long-Term Success
IFG helps employers establish “rabbi trusts” or other informal funding mechanisms to set aside assets while keeping them accessible to creditors, maintaining the plan’s nonqualified status. We manage participant education, making sure executives clearly understand deferral options, taxation rules, and the financial impact of distribution timing. Our team provides ongoing administrative support, including annual enrollment, tracking balances, updating statements, and coordinating payouts at retirement or other trigger events. We also ensure compliance with 409A regulations, including mandatory delays for certain insiders and restrictions on changes to payout schedules. This hands-on approach protects both the employer and the executive by maintaining accuracy, transparency, and compliance every year.
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Frequently Asked Questions
Answers to Common Questions About Deferred Compensation Plans
What is a nonqualified deferred compensation plan, and how does it work?
An NQDC plan allows executives to defer income—such as salary or bonuses—beyond what’s allowed in a 401(k), reducing their taxable income today. The deferred amounts grow tax-deferred until payout, based on the plan’s investment structure. Employers may add matches or credits, but contributions generally vest or pay out only after specific events like retirement. Because funds remain company assets, they must comply with IRS Section 409A rules to avoid penalties.
Why would a company offer deferred compensation instead of simply increasing salaries?
Deferred compensation provides long-term retention benefits that salary increases cannot match. Since payouts are often tied to continued employment or retirement timelines, executives are incentivized to remain with the company. It also allows the business to delay cash outlays until future years, supporting strategic cash-flow planning. Finally, offering a competitive executive benefit helps companies attract leadership talent in competitive industries.
How does IFG ensure a deferred compensation plan complies with 409A?
We guide employers through the timing, documentation, and structural rules required under Section 409A, including initial deferral elections, payout triggers, and distribution timing. Our consultants coordinate with legal and tax professionals to draft compliant plan documents. We educate executives on the restrictions they must follow to avoid penalties, such as limits on changing payout schedules. Ongoing oversight ensures the plan remains compliant as company needs evolve.
What are the risks for executives participating in a deferred compensation plan?
Deferred compensation remains part of the employer’s general assets, meaning funds can be lost if the company faces bankruptcy. Payments must follow strict 409A timing rules, offering less flexibility than traditional retirement accounts. However, these risks are balanced by significant tax benefits and the ability to save far more than in a 401(k). IFG clearly explains risk and reward so executives can make informed decisions.
Can deferred compensation be used for goals other than retirement?
Yes—many NQDC plans allow executives to schedule payouts for specific future needs, such as college tuition or planned career transitions. These pre-retirement distribution options make deferred comp more flexible than many qualified plans. The key is setting elections in advance and adhering to 409A rules that govern timing and changes. IFG helps structure distribution schedules that align executive goals with regulatory requirements.