For employers and their key people
Keep the people the company cannot replace. Then plan for them.
A nonqualified deferred compensation plan lets a company promise its key people pay beyond the qualified-plan limits, which in 2026 cap employee 401(k) deferrals at $24,500 and count only the first $360,000 of compensation. We help the company decide what the program should do, model what it costs, keep it inside the IRC §409A timing rules with its counsel and recordkeeper, and then build each key employee’s own plan around what the program gives them.
The situation
The 401(k) stops where a key employee’s pay begins.
A qualified plan is built for everyone, so its limits bind the highest earners first. In 2026 an employee can defer $24,500, total additions are capped at $72,000, and the plan may count no more than $360,000 of pay. Nondiscrimination testing can send part of a highly compensated employee’s deferral back as a refund. For an owner who wants to reward the three or four people who carry the company, the 401(k) alone cannot do it.
The tools that can, a deferred compensation plan, a supplemental executive retirement plan, phantom stock, restricted shares, a retention bonus with a vesting schedule, all sit outside ERISA’s funding and vesting rules and inside §409A, whose penalty for a timing mistake falls on the employee: the deferred amount becomes taxable, with a 20% additional tax and interest on top. Counsel drafts the documents and the recordkeeper administers them. What is often missing is someone who models what the program does for the company’s cash and for each participant’s balance sheet, and who stays after the plan is signed.
That is our seat, on both sides of the table. The executive page follows one person’s vesting calendar; this page is the company’s program and the plan each key employee builds on it. We do not provide legal or tax advice, and we sell no insurance or product; we design, model, coordinate, and review.
Why it’s complex
Five decisions an executive program forces
Who is in, and why
A top-hat plan stays outside ERISA’s funding, vesting and fiduciary rules only while it is unfunded and limited to a select group of management or highly compensated employees, with a one-time statement to the Department of Labor within 120 days. Cast the group too wide and the exemption is at risk.
See the 401(k) pageElections are made before the year begins
Under §409A, an election to defer next year’s salary must be made by December 31 of this year, and an election on performance pay at least six months before the period ends. The payment date or event is chosen at the same time and is very hard to move later.
See the executive pageDeferred pay is the company’s promise, not the employee’s money
The balance is an unsecured promise. Assets set aside to meet it, even in a rabbi trust, remain reachable by the company’s creditors. Each participant should size a deferral against the company’s credit the way a lender would.
Equity for key people has its own clock
Restricted shares can be taxed at grant with an 83(b) election filed within 30 days; units cannot. Phantom stock and appreciation rights pay in cash and dilute no one. Each route puts the tax at a different date and a different rate.
Read the guideThe change-in-control clause
Payments triggered by a sale that total three times or more of an executive’s five-year average pay lose the company’s deduction and carry a 20% excise tax for the recipient under §280G. A private company can cure it in advance with a vote of more than 75% of its shareholders.
Read the guideSources: IRS Notice 2025-67; 26 U.S.C. §409A(a)(1)(B), (a)(2) and (a)(4); 26 U.S.C. §280G(b) and §4999(a); 26 U.S.C. §83(b)(2); 29 CFR 2520.104-23; 26 CFR 31.3121(v)(2)-1.
Our approach
Designed for the company, then built for the person
We advise the company on the program and, separately and with the company’s knowledge, the people it wants to keep. ERISA counsel drafts the plan, the recordkeeper administers it, and the CPA books it. We model the choices, hold the investment policy for any assets set aside, coordinate the professionals, and return each year when the election window opens.
Name the goal and the people
Retention, recruitment, or replacing pay the qualified plan cannot count: each calls for a different design. We put the candidate group and the company’s five-year cash commitment in writing, and we read the 401(k)’s testing results with the TPA first, since a refund problem is sometimes solved inside the qualified plan.
Choose the structure
An elective deferral plan spends the employee’s money; a supplemental retirement plan spends the company’s; phantom equity and restricted shares tie the reward to value created. We model each side by side: after-tax cost to the company, after-tax value to the employee, the vesting schedule, and the payment events §409A allows, which are separation, disability, death, a fixed date, a change in control, or an unforeseeable emergency.
Test it against the rules
The §409A election and payment terms, the top-hat statement, the FICA timing rule that taxes deferrals when they vest, the six-month delay for senior officers of a public company, and a §280G projection for any change-in-control clause. Where informal funding is planned, we write the investment policy for the account or trust; if an insurance-funded structure is on the table, we evaluate it alongside the company’s insurance advisers and take nothing from the policy.
Run the elections and the reviews
Every fall, each participant gets a short election memo: what can be deferred, by when, and into which payment schedule. We review the plan’s assets against its investment policy, reconcile the recordkeeper’s balances with the company’s liability, and flag any hire, promotion, or exit that changes the group.
Build the personal plan
The deferral decision belongs inside the person’s own tax picture: the bracket today against the bracket in the payout years, the state they will live in when it pays, the company’s credit, and how much of their net worth already sits in the employer. Our Quarterly Rounds then keep cash flow, risk, estate, and tax in sequence around the program.
The work
What you’ll work through with us
- A written objectives memo: who the program is for, what it must do, and what the company can commit
- A review of the qualified plan’s limits and testing results with the TPA before any nonqualified layer is added
- Side-by-side models of deferral, supplemental retirement, phantom equity, and restricted stock designs
- An investment policy statement and menu for assets set aside to meet the plan’s promise
- §409A, top-hat, FICA-timing, and §280G checkpoints, coordinated with the company’s ERISA counsel and CPA
- An annual election memo for each participant, and a reconciliation of balances to the company’s liability
- A personal financial plan for each key employee who wants one: deferral sizing, payout timing, equity concentration, and retirement income
- One point of coordination among counsel, the recordkeeper, the CPA, and the company’s insurance advisers where a policy is under review
Executive benefits work at the firm is led by Theo Halbardier, CFP®, CIMA®, CAIA®, the firm’s founder. The CFP® work is the key employee’s plan; the CIMA® work is the investment policy behind the program’s assets. We are fee-only: no commissions, no product sales. About Theo
Questions
Common questions from employers and key employees
What is nonqualified deferred compensation, and how is it different from a 401(k)?
It is a written promise by the company to pay compensation in a later year, usually at retirement or on a chosen date. Unlike a 401(k), it has no dollar limit, no nondiscrimination testing, and can be offered to a select group only. The trade is security: the money is not held in trust for the employee, and the company’s creditors can reach it. Income tax is deferred until payment; FICA is generally due when the amount vests.
Can you advise the company and the key employee at the same time?
Yes, in separate engagements and with both aware of the other. The company engages us for design, modeling, investment policy, and coordination with its counsel and recordkeeper. A key employee who wants a personal plan engages us as an individual client. We keep the two files apart, and neither pays us for any product.
When does a participant have to make the deferral election?
Before the year the pay is earned. Under IRC §409A, an election to defer next year’s salary must be in by December 31, and an election on performance-based pay at least six months before the performance period ends. A newly eligible participant has 30 days from eligibility. The payment date or event is fixed in the same election; moving it later requires a new election made at least 12 months ahead that pushes payment out at least five years.
What happens if a plan violates §409A?
The penalty lands on the participant. All vested deferrals under that plan and any similar plans become taxable immediately, with an additional 20% tax and interest at a premium rate (§409A(a)(1)(B)). Common causes are elections made late, payment dates changed informally, and separation payments to a senior officer of a public company made inside the six-month waiting period. Counsel drafts to avoid these; we check the calendar each year.
Is deferred compensation safe if the company fails?
No. It is an unsecured promise, and in a bankruptcy the participant stands with the company’s other general creditors. A rabbi trust prevents the company from changing its mind but does not protect against insolvency. We help each participant size the deferral against the company’s credit and the rest of their balance sheet, and we help the company choose informal funding that keeps the promise visible on its books.
Do you sell the life insurance that sometimes funds these plans?
No. We hold no insurance license and receive nothing from any policy. Where a company is considering corporate-owned life insurance as informal funding, we model it against a taxable account or a rabbi trust and review the numbers with the company’s insurance advisers, so the choice is made on cost and fit rather than commission.
We are a nonprofit. Do these rules apply to us?
Differently. Tax-exempt employers use §457(b) plans, with their own annual limit, and §457(f) arrangements for amounts above it. Under §457(f), deferred pay becomes taxable the year the substantial risk of forfeiture lapses, which is usually the vesting date rather than the payment date. That changes the design, and we model it with the organization’s counsel and CPA.
How are you paid for this work?
By the company, under a written engagement, with the fee disclosed at the plan level before the work begins (ERISA §408(b)(2) where it applies). We receive no commissions or revenue sharing from fund companies, recordkeepers, or insurers. A key employee who engages us personally pays a separate advisory fee as an individual client.
Reviewed by Theo Halbardier, CFP® · Updated September 2026 · Figures current for 2026
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