Legal Definitions - nonqualified deferred-compensation plan

A nonqualified deferred-compensation plan is an arrangement offered to executives that allows them to defer compensation and the recognition of its accompanying taxable income to a later date. This type of plan is not qualified for favorable tax treatment under the Internal Revenue Code. The plan avoids the restrictions on qualified plans, especially the limits on contributions and benefits and rules against discrimination in favor of highly compensated employees.

For example, a company may offer its top executives a nonqualified deferred-compensation plan that allows them to defer a portion of their salary until retirement. The deferred amount is not taxed until it is paid out, which can result in significant tax savings for the executive.