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An NQDC plan can be a boon for cash flow, as current earned earnings will only be payable in the future. However, compensation is only deductible for the company when it is actually paid. When are the amounts deferred in a worker`s gross income unpaid? a. The worker is under the control of receiving deferred amounts without having to be subject to substantial restrictions or restrictions. If staff have such control, the amounts are taxable according to the doctrine of constructive reception. For example, the employee may borrow, transfer or use the money as collateral, or there may be other signs of ownership that may be exercised by the worker, which should lead to a current taxation of the worker; or Department of Labor (DOL) Advisory Opinion 81-11A provides that a deferred compensation plan, funded internally by life insurance, is generally treated as unfunded if the following criteria are met: Deferred compensation plans are essentially agreements that your employer makes with you and says that you will receive compensation at some point. There are two types of deferred compensation plans: unqualified deferred compensation plans (NQDCs) and draft plans eligible for deferred compensation. The difference between the two types of plans lies in the way people use them and how the law sees them. There is another financial risk: the return paid on the deferred compensation. A worker may obtain, without delay, a higher return on the amount of after-tax than what is paid under the deferred compensation plan.

In the case of unfunded deferred compensation plans, the employer may purchase insurance to meet its obligations under the plan, but the unqualified deferred compensation plan should not directly link the amount of benefits to the life insurance payments. [2] Note that the worker should have only the rights of an unsecured general creditor. NQDC amounts will be taken into account at a later stage for FUTA purposes when services are provided or where there is no significant risk of recovery with respect to the employee`s right to obtain the deferred amounts to the futa compensation base. Under an unqualified plan, employers generally only derive expenses if the income is covered by the employee or service provider. On the other hand, under a qualified plan, employers have the right to deduct expenses per year, although employees only record income in the years following receipt of distributions. A top hat plan is an unfunded employer-managed plan to provide deferred compensation to a select group of highly disadvantaged executives or employees. [14] If the coverage exceeds this group, then the plan is not a top-hat plan. [15] Because NQDC plans are not qualified, which means they are not under the Employee Income Security Act (ERISA), they provide more flexibility for employers and workers.