A non-qualified deferred compensation (NQDC) plan is an agreement between an employer and employee to defer part of the employee’s earnings until a future date, usually after retirement or leaving the company. Unlike qualified plans such as 401(k)s, NQDCs do not have annual contribution limits, making them a common option for high earners. However, they carry stricter IRS rules and higher risk.
Key features of NQDC plans
No contribution limits: Employees may defer income above the 401(k) ceiling.
Unfunded: Deferred amounts stay on the employer’s books and are not protected in a trust. If the employer faces financial trouble, employees may lose access to deferred amounts.
Section 409A rules:
Elections to defer compensation must be made in the prior calendar year.
Distributions are restricted to specific events such as retirement, termination, or a set future date.
Plans that fail 409A compliance trigger immediate taxation and penalties.
Tax treatment
At deferral: Contributions are taxable for Social Security and Medicare (FICA), and Federal Unemployment (FUTA). They are not taxable for federal or state income taxes until distributed.
At distribution: Contributions and earnings become taxable for federal and state income taxes.
Special cases: If subject to vesting or performance conditions, FICA and FUTA apply once those conditions are met.
Reporting requirements
Form/Box | What to Report |
W-2 Box 11 | Distributions from NQDC plans, or vesting of prior-year deferrals |
W-2 Box 12 Code Y | Employee deferrals (optional) |
W-2 Box 12 Code Z | Non-compliant plans (taxable income) |
1099-MISC Box 12 | Deferrals (optional, same as W-2 Code Y) |
Risks of NQDC plans
If the employer becomes insolvent, deferred amounts may be lost.
Non-compliance with Section 409A can cause all deferred amounts to become immediately taxable.
Need help?
If you have questions or need assistance, please contact Salaris Payroll Support. We’re here to help.