Tax Considerations of NQDC Plans: Meeting 409(A) Requirements, Remitting FICA, Vested Withholding Payments

Deferred compensation is the portion of earnings that is earned in one year but paid in another. Contributions can be made by the employee or employer and can include stock, salary, property, other in-kind items, and certain incentive arrangements. Properly structured, deferring compensation allows deferral of income tax on the amount deferred and any interest or investment return credited to the plan.

NQDCs offer employers the flexibility to provide deferred compensation to certain selected employees without the burden of discrimination and compliance testing. With this flexibility comes significant compliance obligations. Section 409A stipulates that these plans must be in writing and must include specifics outlining how and when to pay the amounts deferred. The repercussions of noncompliance are severe and impact both the employer and employee. The amount deferred and its earnings could be immediately taxable to the employee and subject the employee to a 20 percent penalty plus an enhanced underpayment interest penalty.

Unless limited by the plan itself, an NQDC plan has no contribution limits. However, these plans lack the protection from creditors in the event of the employer's insolvency that is afforded qualified deferred compensation plans. Tax professionals working with businesses and individuals participating in or considering these plans must have a solid understanding of these employers' and employees' tax and compliance obligations.

Listen as our panel of deferred compensation experts explains the caveats and considerations of NQDC plans.

1. NQDC plans: an overview
2. IRC Section 409(a) requirements
3. Penalties and sanctions
4. Payment of FICA and federal taxes
5. W-2 reporting
6. Notable cases
7. State tax considerations

The panel will discuss these and other critical issues:

• What are the primary differences between qualified and non-qualified deferred compensation plans?
• When does FICA tax on amounts deferred have to be remitted?
• How does the rule of administrative convenience affect withholding payments on amounts vested?
• What steps should employers take to ensure their plans meet 409(a) requirements?

Learning Objectives

After completing this course, you will be able to:

• Identify key differences between qualified and non-qualified plans
• Decide when FICA should be remitted on amounts deferred under an NQDC plan
• Ascertain what violations might invalidate an NQDC plan
• Determine which individuals or businesses might benefit from an NQDC plan

• Field of Study: Taxes
• Level of Knowledge: Intermediate
• Advance Preparation: None
• Teaching Method: Seminar/Lecture
• Delivery Method: Group-Internet (via computer)
• Attendance Monitoring Method: Attendance is monitored electronically via a participant's PIN and through a series of attendance verification prompts displayed throughout the program
• Prerequisite: Three years+ business or public firm experience preparing complex tax forms and schedules, supervising other preparers or accountants. Specific knowledge and understanding of individual income taxation, including itemized deductions, individual income tax credits, net operating loss limitations including carrybacks and carryforwards.

Strafford Publications, Inc. is registered with the National Association of State Boards of Accountancy (NASBA) as a sponsor of continuing professional education on the National Registry of CPE Sponsors. State boards of Accountancy have final authority on the acceptance of individual courses for CPE Credits. Complaints regarding registered sponsons may be submitted to NASBA through its website: www.nasbaregistry.org.

IRS Approved Provider

Strafford is an IRS-approved continuing education provider offering certified courses for Enrolled Agents (EA) and Tax Return Preparers (RTRP).