NQDC — Non-Qualified Deferred Compensation
An agreement to pay an executive deferred wages in the future — useful for sheltering income above 401(k) limits, but the money is at risk of company creditors.
What it is
A written promise from the company to pay an executive a portion of compensation later (often retirement). Unlike a 401(k), there's NO contribution limit — but the deferred dollars stay on the company balance sheet, exposed to creditors if the business fails.
How owners structure funding
Many companies informally fund NQDC obligations with COLI (Corporate Owned Life Insurance) — the cash value matches the future obligation, and the death benefit pays out tax-free if the executive dies in service.
§409A compliance
The deferral election must be made BEFORE the year the income is earned, and payout timing must be locked in at election. Violations trigger immediate income tax PLUS a 20% penalty.
Watch out for
- •Unsecured general creditor claim — gone if the business is bankrupt.
- •Can't roll to an IRA at retirement.
- •Section 409A is unforgiving on timing changes.
Educational only — not tax, legal, or investment advice. Talk through your specific situation with a qualified advisor.