Delta’s Non-Qualified Deferred Compensation Plan: A Comprehensive Guide for Pilots

Background

One of the most common financial planning conundrums a high wage earner faces is how to lower their taxes. Unlike high earning business owners who usually report 1099 income, highly compensated professionals, such as doctors, corporate executives and airline pilots, are limited in their ability to utilize deductions to offset their W-2 wages based on current tax law. Unless they’re business owners themselves, the average airline pilot typically relies on pre-tax contributions to their company 401(k)s, HSAs and FSAs to reduce their taxable income annually — and, a few exceptions aside, that’s pretty much the end of it.

In some states, taxable income at the state level can be reduced with contributions to a 529 plan, but these do nothing to affect federal taxes. In any case, these contributions can make a small dent on annual taxable income, but for a pilot whose income puts them well into the top federal income tax bracket, the taxation conundrum remains.

American corporations, as a result, often offer their highly compensated employees additional means to reduce their taxable income through forms of deferred compensation, such as stock options or, as we’ll examine in this article, non-qualified deferred compensation (NQDC) plans.

For Delta Air Lines (DAL) pilots, the provision of Memorandum of Understanding 25-02 in the most recent Pilot Working Agreement (PWA) that establishes a NQDC plan has finally come to fruition, and pilots will have a new savings tool to add to their belt for 2026.

Considering all the various retirement and savings buckets already available to DAL pilots, the specifics of how they all operate cohesively and the financial planning considerations of each can get a bit confusing. Open enrollment is right around the corner, and DAL pilots will have decisions to make, so, with that, let’s dive into the details of Delta’s newest plan.

Understanding Delta’s NQDC Plan Basics

The plans most airlines implement for their workforce are known as “qualified” plans. The term qualified simply means that a retirement plan meets stringent Internal Revenue Service (IRS) and Employee Retirement Income Security Act (ERISA) requirements that, in return, give it favorable tax treatment. Qualified plans typically allow for tax deductible contributions for both the employee and employer, come with annual contribution limits and must adhere to strict testing and non-discrimination requirements — a fancy way of saying that the plan can’t favor highly compensated employees of a company over non-highly compensated employees.

As of the publishing of this article, DAL pilots have two qualified plans: the Delta 401(k) Retirement Plan for Pilots and the Delta Air Lines Market Based Cash Balance Plan (MBCBP). The former is classified as a qualified defined contribution plan with its own set of IRS limits, and the latter is a qualified defined benefit plan with a separate set of IRS limits.

Delta’s NQDC plan by its very name is “non-qualified,” meaning it’s not subject to the same IRS and ERISA requirements as the other two retirement plans. This means the plan very much CAN discriminate which employees have access to this plan, and it also means the plan has much looser regulation in general than a traditional employer retirement plan. These less restrictive guidelines come with both benefits and drawbacks that we’ll cover below.

But first, I want to provide a snapshot of the basics of the plan.

Eligibility requirements

This is a discriminatory plan, and not all employees are eligible. Only employees that meet one or more of the following criteria are eligible:

• They’re over age 55
• They’re a Captain of any aircraft
• They’re a First Officer on any 767-400/A330/A350
• They’re a First Officer Seniority Line Instructor paid at 767-400/A330/A350 rates

Note: Once a pilot becomes eligible, they stay eligible. As an example, if one of the first officers above was displaced from a widebody back to a narrowbody category, they’d remain eligible.

Contribution limits and options

• Deferrals are scheduled on a year-to-year basis. In practice, this gives pilots the ability to “opt in” or “opt out” annually during open enrollment every fall.

• Pilots can defer 75% of their flight pay and 100% of their profit sharing into this account. There’s no IRS limit to the amount of contributions that can be made. Any compensation deferred to the plan will be subject to FICA taxes at the time of deferral, but not federal income tax. A practical example will follow later in this article.

• Distributions can be made either as in-service distributions (while still employed) or once separated from employment. Forms of distribution include a lump sum or annual installments. Distributions are taxed as ordinary income (similar to W-2 income while employed).

• Participants have flexible investment options (much different than with the MBCBP) and can invest very similarly to how they invest in their Delta 401(k).

The Tax Benefits of NQDC Participation

The entire purpose of a deferred compensation plan is to avoid taxes on income during a phase of one’s career when income is at its highest and, therefore, subject to potentially higher tax rates. As an extreme example to illustrate the benefit of deferred compensation, baseball fans might recall that superstar Shohei Otani signed a historic contract with the L.A. Dodgers in 2023. Otani’s contract will pay him $700 million over 10 years — $680 million of which he has chosen to defer until the year 2033, thus saving almost $100 million in taxes that would normally be paid to the IRS and the state of California over that ten-year period (coincidentally, in other shocking news, the California state legislature is trying to pass a law to tax this deferred compensation).

Now short of cracking some massive cheat code in premium pay trips, pilots most likely won’t be making Otani-level wages of $70 million in a year –– but pilots that are eligible for the plan do stand to experience relatively significant tax benefits by deferring compensation to the plan.

Practical tax savings example

To illustrate a more realistic example of how a pilot might benefit, below is a scenario involving an A350 captain with 12+ years of service using a monthly average of 76 credit hours. The scenario will assume 2026 forecasted pay rates, tax brackets and IRS contribution limits. Let’s also assume for the scenario that our pilot is maxing out his 401(k) elective deferrals using pre-tax contributions, that he opted into the MBCBP, and that he’s filing his taxes as “married filing jointly.” Finally, to keep things simple for the purposes of this illustration, we’ll assume the only tax deferral tool the pilot has at his disposal is his 401(k) contributions. The first numbers below assume a pilot doesn’t contribute to their NQDC plan.

• Pay rate: $465/hour
• Annual gross flight pay: $424,199
• Profit sharing pay (15%): $63,630
• Total gross wages: $570,759
• Taxable income after 401(k) deduction and standard deduction: $515,109
• Total FICA and federal income tax combined: $142,529
• Effective tax rate: 25%

Let’s now assume this same pilot has determined that he’s comfortable living off $100,000 less income for 2026. Therefore, the pilot elects to max out his 401(k) as usual but now also defers $100,000 into the NQDC plan.

• Total gross wages: $570,579
  • Less NQDC deferral: $100,000
• Taxable income after 401(k), NQDC deferral and standard deduction: $415,109
• Total FICA and federal income tax combined: $109,875
• Effective tax rate: 19.3%

Finally, let’s assume our pilot is even more frugal, and is willing to defer $300,000 in compensation.

• Total gross wages: $570,579
  • Less NQDC deferral: $300,000
• Taxable income after 401(k), NQDC deferral and standard deduction: $215,109
• Total FICA and federal income tax combined: $60,018
• Effective tax rate: 10.5%

Comparison With Traditional Retirement Plans

While acknowledging that the examples above are very basic and by no means exhaustive, the point shouldn’t be lost regarding the power of this plan in reducing a pilot’s tax burden. Remember there’s NO IRS limit to the amount that can be contributed into the NQDC plan, and pilots can essentially opt in or out year to year as they see fit, giving the pilot flexibility.

To illustrate the advantage of this flexibility, suppose a pilot is receiving some sort of income windfall in the next year outside their work with Delta that would significantly increase their taxable income. They could decide to elect to defer income into the NQDC for that year, making it an excellent tool to mitigate taxes on the windfall.

In addition to the tax savings discussion, other attractive features of the NQDC plan include:

• Flexible investment options, similar to the 401(k), where participants can choose from a suite of index, life cycle and fixed income funds
• No early withdrawal penalty before age 59 ½
• The choice to make deferrals is made annually during open enrollment

Critical Risks Every Pilot Should Consider

So, what’s the catch? There are a few, to be sure, but there’s one catch in particular that will most likely be the biggest deciding factor in whether a pilot decides to defer compensation to the plan: all contributions made to the plan are treated as Delta company assets until distributed, meaning if Delta were to face bankruptcy or insolvency, these assets would be vulnerable to company creditors and lost to the pilot forever.

Bankruptcy and creditor risk

While lack of restrictions on plans like these means they have high savings potential, it also means there are far less protections on them. And, unlike lost pensions of the past, there’s NO backstop to a NQDC plan like the Pension Benefit Guaranty Corporation (PBGC) that allows for the salvaging of a benefit. If a pilot has funds in the NDQD and the company declares bankruptcy, it’s very possible every single cent in that pilot’s account can disappear forever.

To the pilots that are nursing the scars of past bankruptcies, this isn’t an insignificant footnote to the NQDC discussion. The longer one’s longevity at an airline is, the longer one is exposed to the risk of all the ups and downs of the fickle airline industry, and it’s not improbable that someone with a 30-year career ahead of them could face an airline bankruptcy at some point.

The bottom line on this downside is that it’s a calculated risk decision that each individual will have to make on their own if they decide to utilize the NQDC plan. Making heavy deferrals to the plan over a career only to have them all disappear in a bankruptcy would be a hard pill to swallow for any pilot.

Distribution inflexibility

Another downside to the plan is distribution inflexibility. There are some aspects to the NQDC plan that make it quite inflexible compared to a traditional retirement account.

Some of these aspects include:

• An inability to change deferrals for the upcoming year once elections are made in open enrollment (barring emergencies, disabilities or if a hardship withdrawal is taken from one of the qualified plans). In other words, once you elect your deferrals for the next year, there’s nothing you can do to “undo” it.
• There are strict distribution rules with little flexibility. Revisions to in-service withdrawals must be made 12 months in advance. If changing the payment timing or method (lump sum vs. installments) for all distributions, the new payment date must start five years later than the original date.
• A federal withholding tax of 22% is automatically withheld on distributions of less than $1 million for in-service withdrawals. Depending on a taxpayer’s annual income, this could require the taxpayer to make quarterly tax payments to avoid underpayment penalties at the end of the year.
• Upon death, a participant’s beneficiary receives the remaining balance in a single lump sum payment — something that could generate a hefty tax bill, depending on amount distributed.
• Accounts may NOT be rolled into an IRA. These assets remain “company assets” until they’re fully distributed or until/unless the company liquidates them due to financial distress.
• A change in control (CIC) event could trigger a complete restructuring of the plan and distributions. Delta lists a few possible events that could trigger this, although it’s not an exhaustive list, such as:
  • A major change in company ownership (like a merger)
  • A significant change in the voting power or composition of the board of directors
  • The sale of a substantial portion of the company’s assets (financial distress)

Strategic Planning Considerations

When to consider participating in a NQDC plan

The NQDC plan is a significant addition to Delta’s savings options for pilots. For many pilots, it could very well be the most significant tool at their disposal to help reduce their tax burden during their highest earning years. However, it doesn’t come without significant risks. In order to properly weigh these risks, it’s incumbent on pilots to engage in some thorough planning to determine the best course of action, as there’s no blanket “right” or “wrong” recommendation on whether a pilot should make deferrals to the plan.

Distribution planning strategies

For those pilots who elect to make deferrals, a forward-looking distribution strategy is an absolute must to help avoid undue taxation and help ensure future spending needs are met while also looking to minimize exposure to any company “CIC” events that could put the assets at risk.

Working With Creative Planning’s Aviation Team

Our Creative Planning Aviation team specializes in these types of financial planning situations. If you’re a Delta pilot looking for help with questions about the NQDC — or any other financial planning matter — please schedule a call.