Nonqualified deferred compensation (NQDC) retirement plans are becoming more popular than ever in response to ongoing labor challenges.

Many companies offer NQDC plans as a retirement benefit for executive-level employees because IRS contribution limits make 401(k) plans inadequate on their own for many high earners. NQDC plans allow these high-earning employees to set aside more of their income to receive at a later date while also deferring the income tax on those earnings.

Since nonqualified plans are not covered by the Employee Retirement Income Security Act (ERISA), non-discrimination rules do not apply, which means that employers can pick and choose who can participate in an NQDC plan. NQDC plans are also considered “top hat” plans, meaning they can only be offered to a limited number of employees.

Amidst today’s highly competitive talent market, these plans are becoming more popular as a recruiting and retention strategy for key executives. According to the biennial 2022 Newport / PLANSPONSOR Executive Benefits Survey, of the 98% of respondents that have NQDC plans, 42% of those employers are now offering a discretionary or incentive company contribution for a select number of participants in an effort to attract and retain senior manager and executive talent. This number rose from 26% in 2020, which shows a significant effort by these companies to address ongoing pressures in the labor market.

There are several other types of nonqualified plans, such as long-term bonus plans (LTBPs), which allow a company to offer a valuable benefit to a larger population outside of the traditional executive and director groups, likewise in an effort to attract and retain skilled workers.

Nonqualified plans as a whole are changing to suit the evolving needs of participants. Data from the WTW Nonqualified Retirement Benefit Survey shows that the majority of respondents either made changes to their nonqualified retirement plan in the past two years or plan to do so in the next two years, with the main area of focus being improvements to participant education.

NQDC plan sponsors in particular are also focusing on plan education and participant communications in an effort to make their plans more attractive to key executives, according to the 2022 Newport / PLANSPONSOR Executive Benefits Survey.

Connect with a CBIZ professional to learn more about how an NQDC plan could benefit your employees and, in turn, your business.