NQDC lets executives defer part of their pay to a future date, but Social Security and Medicare taxes apply when the pay is deferred or vests, income tax applies when it is paid out, and the balance stays exposed to employer creditor risk.
Why this matters two to eight years from retirement
The distribution schedule for most NQDC plans was locked in at the election, often years before you had any idea what your retirement income would look like. That schedule does not adjust for your Roth conversion plan, your Social Security claim, or the year you leave the company. A distribution landing the same year as a large RMD, or the year you claim Social Security, can push you into a bracket and an IRMAA tier that a different sequencing would have avoided. NQDC has to be modeled alongside every other decision, since it rarely arrives on a schedule built with the rest of the plan in mind.
What this looks like for one executive
An executive elected years ago to receive $600,000 in deferred compensation as a lump sum in the year of separation. If that same year also includes six months of salary, a bonus payout, and the start of Social Security, the deferred comp lands on top of all of it, at the highest marginal rate the household sees that year. Had the plan allowed installment elections at the time of deferral, spreading that $600,000 across five years might have kept more of it inside a lower bracket. This example is illustrative. Your own plan’s terms depend on the elections already on file with your employer.
Related reading
If the decisions on this page are ahead of you, the two of you can work through them with Robert Boeck before any of them becomes permanent.
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