On 22 December 2017, President Trump signed into law the Tax Cuts and Jobs Act of 2017 (TCJA), bringing about the most sweeping changes to the Internal Revenue Code since 1986. Total rewards professionals are now reconsidering the value of various compensation vehicles and employee benefits programs. In the wake of President Trump’s signature tax reform, non qualified deferred compensation (NQDC) plans, which have long provided businesses a competitive advantage in attracting and retaining high-level performers, look even more attractive for many businesses. Savvy business leaders are increasingly taking advantage of the new tax landscape and making NQDC plans a part of their total rewards strategy.
What is an NQDC Plan and What is the Tax Treatment?
Like a more traditional qualified retirement plan (e.g., a 401(k) plan), an NQDC plan is a program that allows employees to earn compensation in one year but not recognize the income – and not pay income tax – until a designated time in the future when the compensation is distributed from the plan. Similar to a qualified retirement plan, an NQDC plan allows deferred compensation to grow, tax-deferred, until the compensation is later paid to the participant.
In this ultra-competitive labour market, employers need to offer competitive total reward packages to attract and retain top talent. NQDC plans, which have always been valuable perks for employees, can be a low-cost benefit that are even more attractive to employers following the adoption of the TCJA due to reduced corporate tax.