Nonqualified deferred compensation plans are not subject to the same required minimum distribution rules that govern qualified retirement accounts.
Key points:
Qualified retirement accounts, such as individual retirement accounts (“IRAs”) and 401(k)s, are valuable savings vehicles, especially with employer matching contributions and tax-deferred growth. However, they operate inside a statutory framework that eventually forces money out. On the other hand, nonqualified deferred compensation plans (“NQDC plans”) are a separate retirement planning tool available to senior executives and other highly paid employees — one that is outside the required minimum distribution regime that applies to qualified retirement plans such as 401(k)s.
Understanding RMDs
Required minimum distributions (“RMDs”) are a mandatory withdrawal system for qualified tax-favored retirement accounts. The Internal Revenue Service describes RMD rules as applying to certain retirement plans, including traditional IRAs and 401(k) plans[i]. The starting age now depends on birth year, with age 73 applying to many current retirees and age 75 applying to younger groups under SECURE 2.0 changes. Once RMDs begin, the account holder must withdraw a calculated minimum each year, based generally on the account balance and life expectancy factors. The result is a mandatory taxable income stream, regardless of the retiree’s desire or need for the cash.
RMDs can create real friction for senior executives because they often retire with several sources of taxable income: equity compensation, taxable investment portfolios, Social Security, and distributions from qualified plans. A forced 401(k) distribution may arrive during a year when the employee is already in a high tax bracket. The individual may prefer to leave the account invested in their qualified retirement account to manage taxable income but the RMD framework prevents this from happening.
NQDC Governance
An NQDC plan can solve part of that problem because its payment schedule is governed by Section 409A of the Internal Revenue Code and the particular plan terms rather than by the annual RMD formula under the qualified-plan rules.
Section 409A generally requires the time and form of payment to be set in advance and limits payment events to specified categories, including separation from service, disability, death, a specified time or fixed schedule, certain changes in corporate control, or an unforeseeable emergency[ii]. Regulations also permit a subsequent change (also known as a “re-deferral”) to an existing distribution election, as long as the change is made at least 12 months before the original distribution date and the new distribution date is at least 5 years after the original date. Within a properly designed plan, NQDC participants can establish a distribution design that serves their broader financial plan. (Note: certain NQDC plan designs may be more restrictive on distribution options than what’s required under the regulations.)
Keeping Control of Distribution Timing
The absence of RMDs is especially valuable because it allows the executive to separate retirement timing from income timing. A 401(k) balance eventually becomes subject to a statutory withdrawal calendar. A nonqualified plan can pay at retirement, at a later specified date, over a fixed number of years, or under another compliant schedule selected in advance. An executive who expects heavy taxable income in the first few years after retirement may elect payments that begin later. Another executive may prefer installments over ten or fifteen years to smooth taxable income. Someone planning a business sale, relocation, charitable giving program, or large liquidity event can coordinate nonqualified plan payments around those events with more precision than the RMD rules allow.
The benefit becomes clearer when viewed through tax-bracket management. RMDs can push income into higher marginal tax brackets, increase Medicare premium surcharges, affect taxation of Social Security benefits, and reduce the room available for capital gains planning or Roth conversion strategies. A nonqualified plan does not eliminate income tax; distributions are taxable when paid. Its advantage lies in timing. For a highly compensated employee, timing is often the central tax-planning variable. The ability to choose a payout schedule in advance can reduce bunching, preserve flexibility in low-income years, and help avoid stacking multiple income sources into the same calendar year.
The absence of RMDs also helps with investment planning. Qualified plan RMDs can force withdrawals even when the participant would prefer to keep assets exposed to long-term growth. The participant can reinvest after taking the distribution, but the withdrawal still creates taxable income and moves the money from a tax-deferred environment into a taxable one. A nonqualified plan can be structured so that payments occur under a fixed schedule aligned with expected spending needs. This can reduce the likelihood that the executive receives taxable cash in years when the cash is unnecessary.
For executives who continue working later in life, the distinction can matter even more. Qualified plan RMD rules contain special rules for some employees who are still working, and those rules can delay RMDs from a current employer’s plan in certain cases. That relief has limits and does not create a permanent planning solution. Highly compensated employees, founders, and senior leaders may hold ownership interests or have multiple qualified accounts that do not all receive the same treatment. An NQDC plan gives the employer a separate design channel for compensation that can be coordinated with the employee’s expected retirement date, leadership transition, and post-employment income needs.
Risk Management
The main limitation is employer solvency risk. Pursuant to 409A rules, NQDC cannot be formally funded like 401(k)s; however, most NQDC plans are informally funded with an asset (e.g.: mutual funds or corporate owned life insurance) that resides on the employer’s balance sheet. This means that NQDC accounts are an unsecured promise and participants are relying on the employer’s future ability to pay. If the employer becomes insolvent, the participant will stand with other general creditors. That risk is part of the bargain. The employee receives tax deferral and payment-design flexibility, including freedom from the RMD regime, in exchange for less security than a funded qualified plan. A highly compensated employee should evaluate the employer’s financial strength, the plan’s funding approach, and change-in-control provisions before treating the benefit as equivalent to a 401(k) balance.
The practical planning value is straightforward. A 401(k) is excellent for broad-based retirement saving, yet its tax benefits come with mandatory distribution rules. An NQDC plan can give a highly compensated employee more control over when deferred compensation becomes taxable. That control can be used to smooth income, avoid unnecessary taxable withdrawals, coordinate retirement cash flow, preserve investment strategy, and integrate compensation with estate and family planning. For employees whose income already exceeds qualified plan limits, the lack of RMD exposure can make a well-designed nonqualified plan a meaningful part of executive compensation and retirement planning.
[i] Internal Revenue Service. Retirement topics - Required minimum distributions (RMDs). Last updated April 8, 2026. https://www.irs.gov/retirement-plans/plan-participant-employee/retirement-topics-required-minimum-distributions-rmds. Retrieved April 28, 2026.
[ii] Internal Revenue Code §409A. Inclusion in gross income of deferred compensation under nonqualified deferred compensation plans
Karr Barth Administrators and its employees do not provide tax or legal advice. Employers (and other service recipients) should consult their own tax and legal advisors before establishing a nonqualified deferred compensation plan, and regarding any potential legal, tax, and other consequences of any investments or other transactions made with respect to a nonqualified deferred compensation plan. Eligible employees (and other eligible service providers) should consult their own tax and legal advisors before deciding to participate in, or making any elections with respect to, a nonqualified deferred compensation plan.