Busting the Myths about Nonqualified Deferred Compensation Plans
Offering a nonqualified deferred compensation (NQDC) plan to help fill the savings gaps created by the annual contribution limits of qualified retirement plans such as a 401(k) is one of the best ways for companies to attract and retain top-level talent.
While NQDC plans have been around for a long time, there are still many misconceptions about these plans that tend to give even tenured investment professionals pause and make them shy away from offering NQDCs as part of their suite of client services. As an advisor, once you understand that these misconceptions are just myths that are easily debunked, you will be able to see the value in offering NQDC plans as part of your services menu.
Five common myths (and the truth) about NQDC plans
Myth #1: Most clients are not a good fit for an NQDC plan.
FACT: NQDC plan designs can be tailored to the needs of each individual client, thus helping advisors better serve plan sponsors and their top executives. These plans can be an essential part of a total compensation plan for key employees. In fact, our 2024 Newport/PLANSPONSOR NQDC Trends Survey found that plan sponsors believe attracting and retaining top talent is the number one objective* when offering an NQDC plan.
Myth #2: These plans are too complex and labor intensive to set up, and to be successful in the NQDC space, I need to become an expert.
FACT: Newport, an Ascensus company, is an expert on all things NQDC. You can leave the complexities, administration, and servicing to us. We work with advisors and plan sponsors every step of the way to help craft plans that allow plan sponsors to see the full benefits of a well-constructed NQDC platform.
Myth #3: NQDC plans are only a good fit for C-Corps.
FACT: C-Corps—or companies that legally separate their owners' or shareholders' assets and income from those of the corporation—receive more favorable tax treatment, for sure, but pass-through company structures such as sole proprietorships, partnerships, LLCs, and more (which make up the vast majority of companies in the United States) also widely utilize NQDC plans. In those cases, the benefits of NQDCs mainly apply to non-owner employees.
Myth #4: Only highly compensated employees can participate in an NQDC plan.
FACT: While highly compensated employees do account for most of the participants in NQDC plans, 1099 employees can also participate. In addition, non-highly compensated employees can participate in a long-term incentive plan (LTIP), which is a non-qualified plan that rewards employees for reaching specific goals that lead to increased shareholder value and allow for employer contributions only.
Myth #5: Companies lose their tax deduction if contributions are made into an NQDC plan.
FACT: While it is true that companies receive a current-year tax deduction on contributions made into a 401(k) plan, with NQDCs, they still receive a tax deduction when distributions occur. In other words, the company does not lose the tax deduction with NQDC plans. It is simply delayed until distributions are made.
Including NQDC plans can grow your business
NQDC plans can be a valuable addition to your services menu and help expand your business, so it’s important to not let the common misconceptions about these plans cloud the bigger picture.
We’re here to help
Our nonqualified consulting specialists can help. We support advisors and plan sponsors through every step of the plan implementation and conversion process (for existing plans) and collaborate closely to manage all aspects, including enrollment, operations, technology, investments, recordkeeping, and administration.
