What Is a Non-Qualified Deferred Compensation Plan?

A non-qualified deferred compensation (NQDC) plan is an agreement between an employer and employee that allows the employee to defer receipt of a portion of their compensation to a future date — typically retirement — avoiding income tax on that amount until it's actually received. Unlike 401(k) plans, NQDC plans have no IRS contribution limits, making them attractive for executives who want to defer large amounts beyond what qualified retirement plans allow. The major risk is that the deferred compensation is an unsecured promise from the employer rather than money held in a separate protected account — if the company goes bankrupt, you could lose your deferred compensation entirely. Section 409A of the tax code imposes strict rules on when and how NQDC amounts can be deferred, paid out, and changed; violations result in immediate taxation of the entire deferred amount plus a 20% penalty and interest. NQDC plans are typically available only to a select group of highly compensated employees, not rank-and-file workers.