Done Correctly, Deferred Compensation Plans Create Win-Win for Physician and Business

Most medical practices may not realize that they can save money by the way they treat deferred compensation. When a physician leaves a practice, often times he/she receives employer compensation which is considered part of a non-qualified deferred compensation plan (NQDC). This plan is designed to compensate high-level executives, unlike a qualified plan 401k. 

Most medical practices may not realize that they can save money by the way they treat deferred compensation. When a physician leaves a practice, often times he/she receives employer compensation which is considered part of a non-qualified deferred compensation plan (NQDC). This plan is designed to compensate high-level executives. Unlike a qualified plan 401k, NQDC is not restricted by nondiscrimination requirements, or contribution or benefit limitations.

The NQDC plan can be either funded or unfunded. The plan is funded when an employer makes a contribution on behalf of the employee that is protected from its creditors or successors. The plan is unfunded when the employer makes a written contract to pay a contribution as promised at some future time after the employee leaves.

As long as the employee performed the services that form the basis for the contribution as of the date of the contribution, and there is no longer substantial risk of forfeiture of the employee’s interest in the fund (meaning it is vested), the contribution is subject to social security and Medicare at the time of vesting. Because most executives earning non-qualified deferred compensation will almost always exceed the social security wage base, it is likely that the contribution and earnings will never be subject to social security tax, since the social security wage base for 2015 is $118,500, much less than most physicians’ compensation. (However, there is no wage limit for Medicare so Medicare tax still applies). This can save both the employee and the employer money.