The Executive’s Guide to Non-Qualified Deferred Compensation Plans: Opportunities, Risks, and Strategies

Some plans might require you to reach a specific age combined with years of service to qualify for favorable treatment. Understanding these provisions might influence your timing decisions about when to retire. One of the most significant considerations with deferred compensation is how it’s affected by changes in your employment status. Unlike your 401(k), which remains yours regardless of employment changes, your deferred compensation can be dramatically impacted by job transitions.

• For plans already in place, the next best alternative is having the plan reviewed for Sec. 409A compliance by a tax adviser.
• The Sec. 409A rules are more than 400 pages and cannot be adequately explained in a single article.
• The NQDC plan can allow for a subsequent deferral or a change in election only under certain conditions, such as receiving deferred compensation at age 70 rather than at age 65.

Instructions for Forms 1099-MISC and 1099-NEC (04/

On the other hand, 401(k) plans adhere to IRS-set contribution limits, meaning that everyone has the same limit on how much they can contribute each year. The Social Security and Medicare tax (FICA on your W-2) is paid on compensation when it is earned, even if you opt to defer it. The IRS has a sample 83(b) form that can be used to report this compensation currently rather than deferring it. Depending on your interaction with Ascensus, other privacy policies may apply in addition to this Policy. The information contained herein is general in nature and is not intended to address the circumstances of any particular individual or entity.

Impact of Employment Changes on Your NQDC Plan

The plan may be offered in addition to, or in place of, a qualified retirement plan such as a 401(k) plan. Pretax contributions to a deferred compensation plan lower an individual’s taxable income. But because plan participants must pay tax on the income as it is withdrawn, employees may want to consider which tax bracket they expect to be in at retirement age. Roth IRAs, which use post-tax contributions, might be a better option for retirees in high-income tax brackets.

Report on Form 1099-MISC or Form 1099-NEC only when payments are made in the course of your trade or business. You are engaged in a trade or business if you operate for gain or profit. However, nonprofit organizations are considered to be engaged in a trade or business and are subject to these reporting requirements. Payments by federal, state, or local government agencies are also reportable. Understanding the key differences between non-qualified deferred compensation plans and qualified plans like 401(k)s is essential for making informed decisions about your financial future.

Instructions for Forms 1099-MISC and 1099-NEC – Main Contents

Plans may also be terminated and provide for the acceleration of payment when there have been certain corporate dissolutions or a change in control. Designing and managing an NQDC plan doesn’t have to feel like attempting a starter, only to see it fall flat. At EGPS, we bring decades of experience in designing and administering custom retirement plans for businesses of all sizes. From figuring out the fine print to ensuring compliance, we rise to the occasion. Since no more than 10-15% of employees can benefit from an NQDC plan, this might feel a little too exclusive to drive overall benefits satisfaction among the broader team. We’ll break down the pros, the cons, and everything in between so you can decide if a nonqualified plan is the right choice.

More Than Just Accountants

9972, published February 23, 2023, lowered the e-file threshold to 10 (calculated by aggregating all information returns), effective for information returns required to be filed on or after January 1, 2024. Excess golden parachute payments are no longer reported on Form 1099-MISC. Many Minnesota executives adopt a “snowbird” approach in retirement, maintaining residences in both Minnesota and a lower-tax state. This requires careful planning to establish proper tax domicile in the lower-tax state before receiving distributions.

Gross proceeds paid to attorneys.

Tax laws and regulations are complex and subject to change, which can materially impact investment results. Fidelity cannot guarantee that the information herein is accurate, complete, or timely. Fidelity makes no warranties with regard to such information or results obtained by its use, and disclaims any liability arising out of your use of, or any tax position taken in reliance on, such information. Consult an attorney or tax professional regarding your specific situation. Recently enacted legislation made a number of changes to the rules regarding defined contribution, defined benefit, and/or individual retirement plans and 529 plans.

Explore How a NQDC Plan May Help Fund Various Financial Goals

As you can see, there are numerous considerations when evaluating your company’s NQDC plan and how it aligns with your personal financial situation. If you need help navigating compensation planning decisions, please reach out to one of our advisors. We will be happy to work with you to review your full balance sheet, cash flow needs, and tax situation to determine if utilizing your NQDC plan is the right choice for you. Meanwhile, 401(k) plans offer immediate tax benefits by allowing participants to contribute on a pre-tax basis. Note that you can make after-tax 401(k) plans to have certain earnings grow tax-free.

• Funded NQDC plans offer more protection for employee contributions, but deferrals are generally taxable in the year they were earned, nullifying the tax benefit that unfunded plans provide.
• The information and opinions expressed in the linked articles are from third parties, and while they are deemed reliable, we cannot guarantee their accuracy.
• Before pursuing any amendments, it is important to have a discussion of the amendments with your tax advisor or legal counsel, as certain amendments may inadvertently trigger a section 409A failure.

Unlike traditional plans, NQDC plans can be tailored to specific groups or individuals, making them a versatile tool in your benefits arsenal/bakery. Unlike 401(k) plans where you can generally change contribution levels throughout the year, NQDC plans have strict election deadlines – typically during annual enrollment periods. Once these deadlines pass, you cannot participate until the next enrollment period. The executives at these companies likely felt confident about deferring compensation – until they weren’t. If you select a date while you’re still working and in a high tax bracket, you could undermine the main tax advantage of these plans. While the tax benefits can be substantial, there’s a critical balance between tax optimization and risk management that every executive needs to understand.

For more information, see the General Instructions for Forms W-2 and W-3, andPub. For information on reporting employee moving expense reimbursements on Form W-2, see the General Instructions for Forms W-2 and W-3. Report royalties from oil, gas, or other mineral properties before reduction for severance and other taxes that may have been withheld and paid. Do not report nonqualified deferred compensation plan faqs for employers oil or gas payments for a working interest in box 2; report payments for working interests in box 1 of Form 1099-NEC.

Complying with ACA tax-exempt hospital requirements

Due to complex tax rules, however, working with a tax professional may be necessary to support compliance and maximize the potential benefits of non-qualified plans. Nonqualified deferred compensation (NQDC) plans are a powerful tool for attracting and retaining talent. Plus, these plans allow employers to offer supplemental retirement benefits to key employees, while giving employees more flexibility and control over their income and taxes.

While contributions are not tax deferred for the employer immediately, participants typically only pay taxes when they receive the funds, such as during retirement or when a payout occurs. This unique structure makes non-qualified plans valuable for companies looking to reward and retain high-performing talent. NQDC refers to any arrangement by the employer to pay compensation in a future taxable year in connection with the performance of services in a current (or prior) taxable year.