Preparing NQDC Plan Participants for Distribution Decision-Making

“…employers, despite reiterating the importance and value of benefits, often do a poor job explaining their offering to employees. ”

Nonqualified deferred compensation (NQDC) plans provide executives and key employees with the opportunity to defer pre-tax income for future distribution, allowing them to save beyond the limits imposed on qualified plans, such as 401(k) plans. However, one of the most critical and often overlooked aspects of these plans involves educating plan participants to make strategic benefit distribution elections.

NQDC plans lack some of the safeguards of qualified retirement plans, and they are governed by complex tax rules under Internal Revenue Code Section 409A. Making decisions strategically, relevant to each plan participant’s situation, is essential for achieving optimal results. By making education, resources, and personalized support available to the employees participating in NQDC plans, plan sponsors can help guide participants through this important decision-making process.

Understanding Challenges NQDC Plan Participants Experience

Plan participants must choose the “form” of their benefit payment, which refers to whether their benefits will be paid in a lump sum or installments, and the “timing” of the payment(s), which can be at retirement, upon separation of service, or on a fixed date.

Questions that NQDC plan participants may ask include:

• How should I estimate my future income and potential tax bracket?
• How do I plan both for long-term financial goals and the unexpected, and allow sufficient liquidity to cover these needs?
• What are the potential penalties for changing my elections, and what triggers penalties?
• How can I determine how much I should be contributing and when I want to receive my benefits in the face of market volatility and job instability?

The Plan Sponsor’s Strategic Role in Supporting Employee Needs

As the plan sponsor, an employer that equips plan participants with guidance and information helps them make informed decisions and align their strategy to support their individual goals and objectives. Plan sponsors can provide this support in multiple ways.

Education and Awareness

Making informed decisions requires that the plan participant understand how plans work. Plan sponsors may choose to provide participants with readily accessible, straightforward educational materials that describe how NQDC distribution elections function.

Guidance can be provided through webinars, live Q&A meetings, or personalized financial planning sessions to help reinforce the plan participants’ understanding and give them support. A company’s executive benefits advisor or consultant may provide some of these materials or facilitate connections to other tax, legal, or plan design professionals to help support the education process.

Decision Modeling Tools

Plan sponsors should consider providing financial calculators or modeling software that enable participants to visualize different benefit distribution scenarios. Many participants benefit from seeing side-by-side comparisons tailored to age, income, projected retirement date, and account balance.

Access to Financial Professionals

Companies can support the success of their NQDC plan participants by encouraging or subsidizing access to financial advisors who understand NQDC planning. A company also might develop a vetted list of professionals familiar with the company’s plan to ensure consistent quality of advice.

Timing Reminders and Communication

Strategic decisions require strategic timing. Proactive communication reduces last-minute decisions and encourages thoughtful planning.

Ongoing Education

Participants’ lives change, and so should their financial strategies. Building a culture of financial literacy ensures NQDC plans remain aligned with evolving goals.

By supporting participants through the benefit distribution election process, plan sponsors also promote regulatory compliance. Mistakes in election timing or form can result in substantial penalties under Section 409A, including immediate taxation and an additional 20% penalty. A well-informed participant is less likely to make such errors.

When employees feel supported in their decision-making, they are more likely to grow in confidence in the company and its leadership. An alliance between the plan sponsor and the plan participant helps foster loyalty, boosts satisfaction with executive compensation packages, and strengthens the employer brand. To learn more about how executive benefit strategies can benefit your organization and its employees, contact [email protected]. We invite you to download our deep-dive report, Preparing NQDC Plan Participants for Strategic Benefit Distribution Decision-Making.

To learn more about other executive benefits strategies, read: Three Nonqualified Plan Strategies Credit Unions Can Utilize for Employee Retention, How the OBBB May Impact Your Organization’s Executive Compensation Limits, and Deferred Compensation Plans for Retaining Valued 1099 Independent Contractors.

This material has been prepared for informational purposes only, and is not intended to provide, and should not be relied on for, accounting, legal or tax advice. Any tax advice contained herein is of a general nature. You should seek specific advice from your tax professional before pursuing any idea contemplated herein. The examples shown are for illustrative purposes only.

Monte Harrick is affiliated with Valmark Securities, Inc. Securities offered through Valmark Securities, Inc. member FINRA, SIPC. Investment Advisory Services offered through Valmark Advisers, Inc. a SEC Registered Investment Advisor. Registration as an Investment Adviser does not imply any certain level of skill or training. 130 Springside Drive, Suite 300, Akron, OH 44333. 800-765-5201. OneDigital is a separate entity from Valmark Securities, Inc. and Valmark Advisers, Inc. Valmark Securities, Inc. and Valmark Advisers, Inc. are independent of and unaffiliated with ODIA. California License #0771797. Check the background of this investment professional on FINRA’s BrokerCheck.

Some of the Financial Professionals associated with OneDigital are registered representatives of and offer securities through Valmark Securities, Inc. a registered broker-dealer, Member FINRA / SIPC. Additionally, some OneDigital Financial Professionals are also Investment Adviser Representatives and offer advisory services through Valmark Advisers, Inc., an SEC registered investment advisor. To help public members determine the specific registrations associated with our Financial Professionals, we recommend reviewing the Broker Check Link that provides insight to the securities registration and company affiliation of our Financial Professionals. Please note that while the individual Financial Professionals can be associated with multiple financial services organizations, the products and services of those independently owned and operated entities can be separate and segregate. OneDigital is a separate entity from Valmark Securities, Inc. and Valmark Advisers, Inc.

Sources:
SHRM: “8 Ways to Sustain Employee Benefits Engagment Year Round”, July 2025