How Non-Qualified Deferred Compensation Plans Work

Key Takeaways

• Elections for deferred comp plans are locked in for the year—you cannot adjust contributions mid-year like you can with a 401(k), so you must carefully estimate your compensation in the fall when making elections
• You must elect your exact distribution method (lump sum, 5-year installment, 10-year installment, or specific calendar year) when deferring money, and changing that election later requires at least 5 years waiting period plus 12 months advance notice
• Prioritize funding HSAs and maxing out 401(k)s before contributing to deferred comp plans, since those accounts have fewer restrictions and complications
• Match your investment risk level to your distribution timeline—if money is scheduled to pay out in 4-5 years, use conservative investments rather than 100% stocks to reduce sequence risk tied to market timing
• Be aware of company bankruptcy risk—deferred comp is generally an unfunded liability, so weigh the tax benefits of spreading distributions over time against potential loss of benefits if your employer fails