“Nonqualified deferred compensation” is a compensation arrangement established by employers to provide retirement income and perhaps death and disability benefits to a select employee or a select group of highly compensated employees (or, in some cases, independent contractors). The arrangement is a contractual commitment between an employer and the participant that specifies when and under what circumstances future compensation will be paid. When properly arranged and administered, the participant (or the participant’s beneficiary) can postpone federal income taxation of the deferred amounts until benefits are paid.
A nonqualified deferred compensation arrangement is to be distinguished from a qualified deferred compensation plan, which refers to a pension, profit sharing, or stock bonus plan (and all the various permutations thereof) that meets the qualification requirements of Code Section 401(a) and whose assets are held in a tax-exempt trust under Code Section 501(a) or in life insurance and/or annuity contracts pursuant to Code Section 403(a).