A Non-qualified Deferred Compensation Plan is an agreement between the employer and employee that enables an executive or selected employee to defer a portion of their income until a later date above and beyond the amount they are electing through other payroll deduction programs. This can be particularly beneficial for individuals who would like to defer more per year than the qualified plan limits allow. Typically the deferral is until retirement, however this can be 5 years, 10 years or a specific date which means it can be used to fund other goals. The employee can decided how much of their income to defer and which form of income to defer: salary, bonus, overtime, etc. The amount of the deferral can also fluctuate from year to year.
This is beneficial to the executive as the there is no income taxation on the amount of income deferred, and the growth is tax deferred until received. An executive will most likely invest the funds. The taxes are paid on the amount of income withdrawn in the year of withdrawal. Although there is no income tax paid on the income deferred the executive will pay Social Security and Medicare taxes on the deferred income as if it had been taken. The contribution into the plan is not tax deductible to the employer until such time that the executive has the ability to take the funds.