Nonqualified Deferred Compensation Plans for Business GWA

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Leverage NQDC plans to give your company an edge in attracting the talent that takes you to the next level. Deferred compensation plans for business are required to comply with Internal Revenue Code (IRC) Section 409A, which, among other things, guides when a plan can pay benefits to executive participants. Violation of these rules can result in the loss of tax advantages as well as penalties. Depending
on the structure of your plan, your account balance may consist solely of your
own compensation deferrals. Your balance may also include amounts from your
employer, if your employer offers a matching contribution or decides to reward
you with a discretionary contribution.

  • Before you enter one, be sure that you have a full understanding of what they entail.
  • RSM US LLP is a limited liability partnership and the U.S. member firm of RSM International, a global network of independent audit, tax and consulting firms.
  • Set by the Social Security Administration, the Social Security wage cap will rise in 2017 to $127,200, a significant increase from $118,500 in 2016.
  • With only 36% of small businesses surviving after 10 years, enrolling in a nonqualified deferred compensation plan can be risky for employees.
  • Thus, when distributions are made, they include both the compensation and what amounts to earnings on that compensation (though there are no actual earnings; it’s merely a bookkeeping entry).

And most significantly, the money is not secured from your creditors or your company’s creditors in bankruptcy. If you’re wondering if you should participate in a deferred compensation plan, consider whether the risks are worth the potential rewards. Participants in NQDC plans choosing how much of next year’s salary to defer can find plenty of guidance at on issues to consider. Consider the alternative minimum tax (AMT) income exemption amounts, the point where the AMT exemption phaseout starts, and the threshold for the higher AMT rate. Nonqualified deferred compensation itself is not an AMT preference item. However, deferrals of income can serve to prevent you from triggering the AMT in a tax year; conversely, income you receive in a distribution can trigger the AMT.

What Is a Deferred Compensation Plan for Business?

NQDC plans provide executives with pre-tax deferred compensation that they receive at a later date, usually after they’re retired. NQDC plans enable organizations to spend more on operations in the near term and allow employees to receive income when they’re potentially in a lower tax bracket. Do you max out your 401(k) (along with other options including HSAs and IRAs) but still want to save more for retirement or other goals? If your employer offers a nonqualified deferred compensation (NQDC) plan, you might want to explore this option. NQDC plans (sometimes known as deferred compensation programs, or DCPs, or elective deferral programs, or EDPs) allow executives to defer a much larger portion of their compensation and to defer taxes on the money until the deferral is paid.

  • NQDC plans provide executives with pre-tax deferred compensation that they receive at a later date, usually after they’re retired.
  • Though it is discouraged, employees who contribute to 401(k)s or other qualified plans are legally allowed to withdraw funds at any time.
  • While a NQDC plan offers long-term tax-deferred savings for employees, the deferral also applies to the employer’s tax deduction, which limits deductions until employees include the amounts in taxable compensation.

Taxation timing is probably the most advantageous next to the unlimited deferral amount. NQDC plans help employees manage the impact of taxes using the plan’s flexibility based on when benefits are paid. Those who participate defer a portion of their annual compensation into the plan before taxes.

What Are the Benefits?

If the mistakes are outside the time limits, then all amounts deferred under the plan — even amounts deferred or payments made in compliance with Sec. 409A — are immediately taxable and subject to the 20% penalty with interest. Nonqualified deferred compensation plans are inexpensive to establish, and they can increase cash flow and help you retain top talent. Participants have the ability to coordinate the timing of receiving deferred comp income with Social Security or other benefits such as a 401(k) plan. Often times participants will fund their retirement with deferred comp first, then receive Social Security and 401(k) plan benefits later. Participants can delay receiving deferred comp income while they are working and their marginal tax rates are high and instead receive income during retirement when their average tax rate may be lower.

Nonqualified Deferred Compensation Plan Faqs For Employers

Employees can save up money beyond the contribution limits of a qualified deferred compensation plan. And, the employee could walk away with a high rate of return on the money they defer. The IRS imposes strict limitations on the amount of money you contribute to a qualified retirement plan, like a 401(k). Deferred compensation plans have no such federally mandated limits, though employers may specify a contribution limit based on your compensation. If you are a highly compensated employee, you can maximize contributions to your 401(k) and then continue to build your retirement savings through an NQDC plan without restriction.


Therefore, failure to follow the special timing rule may lead to both the employer and employee paying unnecessary FICA taxes. Are you working in a high-tax state but plan to retire in a state with low or no income tax? If so, a nonqualified deferred compensation plan could give you a greater tax benefit, as you avoid tax now at higher rates. The rules governing nonqualified deferred compensation plans are very plan-specific, so be sure to read your plan description entirely before deciding whether to enroll.

This will give you the flexibility to invest the money and use it when you need it. While all investments carry market risk, a taxable investment account isn’t just an IOU from your employer. The contribution limits for qualified plans are provided under Section 415 of the Internal Revenue Code, and every autumn the IRS announces figures for the following year. While there are slight increases in some limits for 2018, in others the 2017 figures continue.


Ayfer Ceylan

All stories by: Ayfer Ceylan

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