As an officer in the military, you may have contributed a large portion of your pay to a thrift savings plan, which is a retirement savings plan similar to a 401(k) or 403(b). If you did, you may now have sizable retirement savings. In addition, if you served for 40 or more years, you receive 100 percent of your pre-retirement base salary. Although these combined payments may be large, none of your military retirement qualifies as a nonqualified deferred compensation plan.
The government pays your military retirement pay to you as a pension. As a pension, it is a defined benefit plan classified as a qualified deferred compensation plan. If you receive payments in retirement from a thrift savings plan you paid into, this is a defined contribution plan, which also falls under the classification of a qualified deferred compensation plan.
Nonqualified Deferred Compensation Plan
A nonqualified deferred compensation plan is a contractual arrangement in which your employer agrees to pay you in the future for services you render today. Most NQDC plans target executives. The plans allow you to defer a large portion of your current compensation until you retire and occupy a lower tax bracket. Cash payments typically begin once you retire, become disabled or otherwise leave employment. 401(k)s and 403(b)s are qualified deferred compensation plans.
NQDC Plan Purpose
Due to the annual contribution limits the Internal Revenue Service places on defined contribution plan contributions, these plans generally provide insufficient retirement savings for high earners. For example, if you earn $300,000, the $17,000 maximum contribution is only 5.67 percent of your annual income. You would not meet your income goals with this savings rate. An NQDC plan allows you to defer a large portion of your salary into the plan every year.
Upon retirement from the military with 20 or more years of service, you receive a military pension as your retirement pay. This pay is from a qualified deferred compensation plan known as a defined benefit plan. However, if you are disabled, you may have retired with less than 20 years on a medical retirement and receive medical retirement pay.
Thrift Savings Plan
When you were an active member of the military, you were able to contribute anywhere from one to 100 percent of your incentive pay, special pay or bonus pay to a thrift service plan as long as you contributed something from your base pay. Your maximum allowable contribution was $17,000 for the 2012 tax year, but you could also contribute an additional $5,000 under a catch-up provision if you were age 50 or over.
However, any combat zone pay was exempt from the$17,000 contribution limit. This may therefore seem like an NQDC, but it is not. TSPs are similar to 401(k)s. Both are defined contribution plans, and the payment and withdrawal processes are comparable.
Tiffany C. Wright has been writing since 2007. She is a business owner, interim CEO and author of "Solving the Capital Equation: Financing Solutions for Small Businesses." Wright has helped companies obtain more than $31 million in financing. She holds a master's degree in finance and entrepreneurial management from the Wharton School of the University of Pennsylvania.