What type of compensation is considered non-qualified deferred compensation?

Non-qualified deferred compensation refers to any compensation that does not meet the requirements set forth by the Internal Revenue Service (IRS) for qualified retirement plans. The significance of this type of compensation lies in its structure, which allows employees to defer portions of their income until a later date, typically until they retire or leave the company.

Compensation categorized as non-qualified includes various forms of compensation that are not bound by the limits and regulations of qualified plans. This allows employers to offer greater flexibility and potentially larger amounts of deferred compensation to select employees, bypassing the stringent requirements of qualified plans like 401(k)s. The other types of compensation listed, such as retirement benefits, incentive bonuses, and stock options, can either fall under qualified plans or may be subject to specific regulatory conditions that disqualify them from being considered non-qualified.

Understanding this distinction helps in grasping how different compensation strategies can aid in tax planning and retirement funding, especially for higher earners who may exceed contribution limits in qualified plans.