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Nonqualified deferred compensation plans — Benefits

Deferred compensation plans are arrangements for postponing a service provider’s receipt of compensation, usually to a taxable year after the taxable year in which the compensation was earned. nonqualified deferred compensation plans are arrangements for postponing compensation that do not meet the applicable requirements for favorable tax treatment discussed in Chapter 09: Retirement plans and Chapter 10: Additional 401(k) qualification requirements. Plans of this kind nevertheless permit a certain degree of tax planning for high-income employees who may benefit from having their earnings paid over a period of several years, including their retirement years.

In a nonqualified deferred compensation plan for employees (the only kind of plan discussed in this chapter), an employer typically agrees to pay a portion of an employee’s compensation on one or more specified dates in the future, or to pay the compensation starting on a date to be determined by the occurrence of a specified event. An agreement of this nature typically results in the payment of compensation (and its inclusion in income) in a tax year later than the tax year in which the right to the payment was earned. However, nonqualified deferred compensation plans ordinarily cannot achieve the desired tax effect unless the employer’s promise to...


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