In Depth
Nonqualified deferred compensation (NQDC) plans allow executives to voluntarily defer a portion of their salary, bonus, or equity compensation to a future date, typically retirement, beyond the contribution limits imposed on tax-qualified plans like 401(k)s. While 401(k) contributions are capped at $23,500 per year (2025 limit), NQDC plans have no such cap, enabling executives to defer hundreds of thousands or even millions of dollars annually. The deferred amounts grow on a tax-deferred basis, meaning the executive does not pay income tax until the compensation is distributed. Companies may offer a variety of investment options within the plan, and some provide matching contributions or above-market returns, which must be separately disclosed in the Summary Compensation Table. Unlike 401(k) plans, which are protected under ERISA and held in trust for the employee's benefit, NQDC plan balances are unsecured obligations of the company. This means that if the company goes bankrupt, the executive's deferred compensation could be lost, the executive becomes a general creditor. Section 409A of the Internal Revenue Code, enacted in 2004, imposes strict rules on the timing of deferral elections and distributions from NQDC plans, with harsh tax penalties for non-compliance. Changes in the accumulated value of NQDC plans are reported in the "Change in Pension Value and Nonqualified Deferred Compensation Earnings" column of the Summary Compensation Table, but only to the extent they represent above-market or preferential earnings. The total accumulated balance in the NQDC plan is disclosed in a separate table in the proxy statement.