Wealth Buildign

Section 409A: NQDC Plans Let You Decide How Much Income Is Taxed Each Year

     Our recent article, The World of Non-Qualified Plans, addresses the proposition that executives in Corporate America primarily use Non-Qualified Plans for tax planning, wealth building and retirement planning.  That is also true for many business owners and professionals blessed to be high income earners.

   The World of Non-Qualified Plans points out there are three (3) different types of Executive Compensation Plans primarily used in the market place:

  • Supplemental Executive Retirement Plans (SERP),
  • Non-Qualified Deferred Compensation Plans (NQDC), and
  • Executive Bonus Plans.

   In 2011, the 12,500 doctors of Kaiser Medical Group chose to participate in the company’s Non-Qualified Deferred Compensation Plan -- NQDC for short. It is the largest NQDC filed with the Department of Labor. (See Department of Labor Fact Sheet).

  That raises the natural question - “What Is A Non-Qualified Deferred Compensation Plan”.  

  It also raises the question, Why Did The Doctors of Kaiser Medical Group Choose A NQDC Plan -- and Not Just Rely on a 401k Plan?

Section 409A: The Statutory Basis for Building Wealth With Pretax Funds

   Any individual who has an interest in paying less taxes to the government should be familiar with NQDC plans under Section 409A of the IRS Code.  The individual who wants to set aside more savings on a pre-tax basis should be intimately familiar with Non-Qualified Deferred Compensation Plans under Section 409A.

   The website myNQDC.com is the most comprehensive site online for learning about NQDC plans.  It is maintained by lawyers at the international law firm of Winston & Strawn with over 850 attorneys in nearly 20 offices throughout the world.  

  The law allows you to defer an unlimited amount of income each year on a pre-tax basis.  The company’s 401k plan should not be your primary vehicle for saving taxes each year.  

   You should understand why your primary vehicle for savings on taxes each year and building wealth with pre-tax funds should be a Non-Qualified Deferred Compensation Plan.

   Under Section 409A, you can enter into an agreement with your employer to defer receipt of income and defer taxes on that income.  That is a private agreement between you and your employer.  

   If you comply with the Deferral Election Rules, Funding Rules and Distribution Rules that apply to Deferred Compensation plans under Section 409A, you and your employer can agree to defer recognition of any amount of income you want to shield from taxes.  

   NQDC plans under Section 409A allow you to decide how much income is taxed each year.