Maximizing Bonding Capacity: Why Contractors Should Consider Non-Qualified Deferred Compensation Plans Over 401(k)s

For construction and government contractors, bonding capacity is everything. Whether it's bid bonds, performance bonds, or payment bonds, your ability to take on large projects often depends on the strength of your balance sheet. While most businesses look to tax-deferred retirement plans like 401(k)s as a no-brainer for owner and executive compensation, they may actually undermine your bonding potential.

That's where Non-Qualified Deferred Compensation (NQDC) plans come into play. For contractors, these plans offer a strategic alternative that keeps critical capital on the balance sheet while still delivering retirement planning advantages.

The Bonding Problem with 401(k)s

Traditional 401(k) contributions reduce taxable income, which is great from a tax standpoint—but there's a catch for contractors:💸 Once those funds are contributed, they're no longer company assets. They become personal assets of the participants and disappear from your balance sheet.

For bonding companies that evaluate your net worth and working capital, this means your company looks weaker on paper, even though you've simply moved money into retirement accounts.

If your goal is to maximize bonding lines, this becomes a problem. Less equity and working capital often translates into lower bonding limits or less favorable terms.

Why Consider a Non-Qualified Deferred Compensation (NQDC) Plan?

NQDC plans can be customized to defer compensation for owners, key executives, or other employees without triggering immediate income taxation—and more importantly:

✅ The funds stay on the company’s balance sheet.

✅ They can be structured as a company liability, not an asset that leaves your books.

✅ They demonstrate financial strength to bonding companies, increasing trust and bonding capacity.

NQDC plans don’t have to follow ERISA rules like 401(k)s, which gives them more flexibility in how and when you fund them. This means you can tailor the plan to your cash flow and bonding requirements.

Key Differences: 401(k) vs NQDC for Bonding Strategy

Feature	401(k)	Non-Qualified Deferred Compensation
Contributions	Tax-deferred, leaves company balance sheet	Deferred, stays on balance sheet as liability
Flexibility	Limited by ERISA rules	Highly customizable
ERISA Coverage	Yes	No
Employee Participation	Broad-based, often mandatory	Selective, targeted at owners/key execs
Effect on Bonding	Reduces working capital	Enhances working capital

How It Works in Practice

Imagine you’re a contractor with $500,000 in owner compensation. You want to defer $150,000 for retirement purposes.

• If you use a 401(k), that money disappears from your balance sheet—hurting your net worth and bonding capacity.

• If you use a NQDC plan, the funds stay within the company, booked as a liability. From a bonding perspective, that looks far more favorable.

In other words, a well-structured NQDC plan allows you to "have your cake and eat it too"—providing for future retirement without sacrificing the present-day balance sheet strength that bonding companies want to see.

Things to Consider

While NQDC plans offer advantages, they’re not without risk. Because the plan is unfunded and subject to creditor claims, it’s crucial to work with legal and tax professionals to design them properly. Many companies also pair these plans with corporate-owned life insurance (COLI) to help mitigate risk and fund future obligations.

Conclusion

Contractors who rely on bonding to grow should take a hard look at how compensation planning affects their balance sheet. While 401(k)s are the default for many businesses, they may not be the best fit for bond-reliant contractors.

Non-Qualified Deferred Compensation plans offer a flexible, strategic alternative that preserves capital on your books—enhancing your ability to secure larger bonds and grow your company.