The Many Uses of NQDC Funds

In our 2020 PLANADVISER Recordkeeper Services Survey, 39 providers reported serving a nonqualified deferred compensation (NQDC) plan. Seventeen—including 65% of responding Section 409A plans—answered a separate, detailed NQDC questionnaire regarding plan type, plus liabilities and number of participants.

With Section 409A plans, participants earn compensation—i.e., from salary, incentive pay or stock—in one year that will be paid at some point in the future. Therefore, participants make elections for deferrals and distributions ahead of when the deferrals will be made.

Further, with 409A plans, the plan sponsor has a large degree of flexibility in plan design. It can specify whether participants’ money is available to them before retirement or at a separation of service, says Steve Marrow, senior vice president of plan sponsor strategy and analytics at Fidelity Investments.

To recruit top talent, Marrow notes, sponsors might want to let the plan meet executives’ financial needs beyond retirement. “If the plan is designed so that in-service distributions may be elected for employer money, any vesting schedule attached to that money would have to be considered for distribution timing,” he adds.

Mark West, national vice president of business solutions at Principal Financial Group, says 457(f) plans are used by plan sponsors more as a retention mechanism and do not offer the various payment dates that Section 409A plans do.

The most common use of NQDC plan accounts is to bridge the gap for participants who want to retire early and avoid dipping into their qualified account or taking Social Security before age 70, West says. As for other uses of in-service distributions, paying for a child’s education is a use that Principal sees the most, West says.