myNQDC | Basics of NQDC

1. What makes nonqualified deferred compensation "nonqualified"?

It automatically meets IRS criteria for deferred compensation, i.e. it needs no special "qualification" by the IRS
It can be used only by companies that are not listed on a stock exchange and which thus do not "qualify" for equity incentives
It is not subject to Internal Revenue Code Section 409A, which taxes "qualified" plans
It does not qualify for beneficial tax treatment because it does not meet the rules for "qualified" plans in the Internal Revenue Code

2. What is one advantage that NQDC has over qualified deferral plans, such as 401(k)s?

The money you defer cannot be reached by creditors if the company becomes insolvent
With NQDC, you must hold the deferred amounts until retirement, and your tax rate will always be lower
NQDC lets you defer more money per year than a 401(k) plan does
The investment choices available through NQDC plans offer higher returns than those of traditional 401(k) plans

3. Which of the following cannot be deferred under a nonqualified deferred compensation plan?

Sales commissions
Shares from the exercise of stock options
Bonuses
Salary

4. Which of the following can participate in NQDC plans?

Highly paid employees, executives, outside directors, consultants, and contractors
All employees
Only senior executives and upper-level management
Only officers listed in the proxy statement plus outside directors

5. As long as your company allows it, what is the maximum percentage of salary and bonus you can defer through NQDC plans?

100%
50%
25%
15%

6. Which of the following forms of payout is not available with NQDC?

A lump sum of cash or shares
A series of installments in cash or shares
Stock options
An annuity

7. When do you make a deferral election for salary?

Before the end of the year during which the income is earned
At the start of the year during which the income is earned
In the year after the income is earned
In the year before the income is earned

8. If you change your deferral election, how many years must the distribution date be from the original distribution date?

No more than two years
No more than three years
At least four years
At least five years

9. Which of the following can be used to hold deferred amounts in a way that offers tax deferral and separation of money from other corporate uses, though only limited protection in corporate bankruptcy?

A secular trust
A rabbi trust
A charitable remainder trust
Corporate-owned life insurance

10. Which of the following is not generally used to informally fund NQDC plans?

Mutual funds
Corporate-owned life insurance
Exchange-traded funds (ETFs)
Bank loans

11. What happens to deferred money upon job loss?

It rolls over into your 401(k) balance
It transfers to either a new NQDC plan or a new 401(k) at your next employer
It is distributed to you immediately in accordance with the plan's provisions
You roll it over into an IRA

12. Can deferred amounts be distributed to me for certain financial goals or life events before retirement without incurring a penalty under Section 409A?

No, NQDC plans are for retirement only
Only under plans that were set up before January 1, 2005, and have specified triggering events
Only for plans that use rabbi trusts or secular trusts
Only if your plan allows "in-service distributions" that you elected properly, and/or has specified triggering events

13. Which of the following does not potentially pose a risk to nonqualified deferred compensation?

Corporate bankruptcy
A corporate change of mind about paying distributions from the NQDC plan
An acquisition of the company
An acquisition by the company

14. Which section of the Internal Revenue Code provides the rules for elections and distributions of nonqualified deferred compensation?

Section 401(k)
Section 409A
Section 423
Section 457

15. Is NQDC protected under the Employee Retirement Income Security Act (ERISA)?

NQDC is completely protected by ERISA as long as your company has a 401(k) plan
NQDC is protected by ERISA, but only at publicly traded companies
NQDC is protected by ERISA, but only at privately held companies
NQDC is not protected by ERISA

Basics of NQDC Quiz