Accredited Wealth Management Advisor Practice Exam

What is a key advantage of a nonqualified deferred compensation plan for Simon?

1. Deferrals to the plan are not subject to payroll taxes

2. A major benefit is deferral of taxation on income

3. Some benefits are funded by the employee

4. No limit on compensation contributed to the plan

The correct answer is: Some benefits are funded by the employee

The key advantage of a nonqualified deferred compensation plan lies in the fact that there are no formal limits on the amount of compensation that can be contributed to the plan. This flexibility allows employees, like Simon, to defer a significant portion of their income beyond the limitations typically imposed by qualified plans, such as 401(k)s. Nonqualified plans can be structured to align more closely with the financial goals of high-earning employees who wish to maximize their pre-tax savings and manage their tax liabilities effectively. This characteristic is particularly beneficial for executives and highly compensated employees because it allows them to retain more control over their compensation and to strategize their retirement planning without the constraints that characterize qualified plans. Moreover, it can offer a greater degree of customization regarding benefits and funding options, enhancing its appeal for affluent individuals looking to optimize their financial planning strategies. While the other options touch on relevant aspects of nonqualified plans, such as tax deferrals and payroll tax implications, they do not encapsulate the primary advantage highlighted here, which is the unrestricted capacity for contribution that distinguishes these plans from qualified options.