Enhancing Employee Retention

Nonqualified deferred compensation (NQDC) plans are often offered by employers alongside the qualified plan to recruit and retain top talent. These plans have a lot of flexibility in design that allows employers to customize them to the unique needs of their employees which allows them to create a benefits package that is competitive to its industry peers to recruit for executive and leadership positions.

PSCA’s recently released 2023 NQDC Plan Survey, sponsored by Lincoln Financial and Principal Financial Group®, shows that though these plans are still most often seen as a recruitment tool, more employers are focused on education and including the NQDC plan as part of a holistic financial wellness program, increasing the use of these plans as a retention tool as well.

Deferred Designs

Though NQDC plan designs may vary significantly in terms of objectives, eligibility, and provisions, they tend not to change much year-over-year. Historically, about a third of companies offer a nonqualified plan to key employees in addition to the qualified plan offering, though this is size correlated with three-fourths of large companies offering a NQDC plan and very few small companies doing so.

Many NQDC plans are designed to offer a comparable level of value where the tax code limits tax-qualified plans – the most common contribution formula (and most plans make contributions) is a “restoration match” which allows for an equal matching as in the qualified above the IRS imposed limits.

Eligibility to participate in these plans is generally limited to s small subset (usually 10 percent or less, though there is no statutory limit) of highly compensated employees and based on a plan-defined criteria (most commonly job title or position). Additional design features include customizing the timing of distributions, including non-compete clauses, and/or “bad actor” clauses.

Data highlights from the 2023 survey include:

1. Eligible Employees: On average, 7.0 percent of total employees are eligible to participate NQDC plans.
2. Eligible Criteria: Position/job title remains the most common eligibility criteria, relied upon in more than three-quarters of plans.
3. Participation: Sixty-three percent of eligible employees participate in the NQDC plan, deferring an average of 10 percent of base pay and 30 percent of bonus pay.
4. Employer Match:  Three-fourths of employers make contributions to the NQDC plan – most commonly a “restoration match” (48.4 percent of plans), designed to fill the gap from the match excluded from the 401(k) plan due to IRS limits.
5. NQDC Plan Funding: Sixty percent of plans set funds aside to cover future obligations. Of those that do, 80 percent put it in a Rabbi trust.
6. Investment Options: More than half of organizations use the same investment options in the NQDC plan as in their qualified plan, and two-thirds use the same recordkeeper for both plans.
7. Distributions: Sixty percent of plans allow in-service distributions and two-thirds allow unforeseeable emergency distributions.
8. Education: Nearly three-quarters of organizations provide NQDC-specific plan education to eligible employees, up from half of plans just four years ago.
9. Financial Wellness: A third of organizations include NQDC education as part of their financial wellness program, up from 19 percent in 2022.
10. NQDC Goal: Eighty percent of respondents offer a NQDC plan to make their benefits package more competitive when recruiting key employees. 

PSCA's 2023 NQDC Plan Survey was conducted in October 2023 and reflects the responses from 159 organizations that offer a NQDC plan to employees. The full survey is available for purchase on PSCA’s website.