What is the purpose of Section 409A?
Section 409A of the United States Internal Revenue Code regulates nonqualified deferred compensation paid by a “service recipient” to a “service provider” by generally imposing a 20% excise tax when certain design or operational rules contained in the section are violated.
What are nonqualified deferred compensation plans?
A non-qualified deferred compensation (NQDC) plan allows a service provider (e.g., an employee) to earn wages, bonuses, or other compensation in one year but receive the earnings—and defer the income tax on them—in a later year.
What are 409A requirements?
Under Section 409A, nonqualified plan distributions must be limited to one of these six options:
- Employee’s separation from service;
- Employee’s disability;
- Employee’s death;
- A fixed time or schedule;
- A change in company ownership or ownership of a substantial portion of company assets; or.
- An unforeseeable emergency.
What are deferred compensation plans?
A deferred compensation plan withholds a portion of an employee’s pay until a specified date, usually retirement. The lump-sum owed to an employee in this type of plan is paid out on that date. Examples of deferred compensation plans include pensions, retirement plans, and employee stock options.
What is Section 457A?
LAW AND ANALYSIS. Section 457A(a) provides that any compensation that is deferred under a nonqualified deferred compensation plan of a nonqualified entity shall be includible in gross income when there is no substantial risk of forfeiture of the rights to such compensation.
What happens to deferred compensation if I quit?
In general, you pay income tax on withdrawals from a qualified deferred compensation plan. … Some NQDC plans stipulate that you could forfeit all or part of your deferred compensation if you leave the company early.
What are different types of nonqualified deferred compensation?
There are two main types of nonqualified deferred compensation plans from which small business owners may choose: supplemental executive retirement plans (SERPs) and deferred savings plans. These two options share several common characteristics, but there are also important differences between the two.
How are nonqualified deferred compensation distributions taxed?
Distributions to employees from nonqualified deferred compensation plans are considered wages subject to income tax upon distribution. … If the participant’s total supplemental wages from all sources exceeds $1 million, federal tax must be withheld at the flat rate of 35 percent.
What is the advantage of nonqualified deferred compensation plans?
Nonqualified deferred compensation plans benefit both you and your employees. For employers like you, a NQDC plan offers: Flexibility: You can choose which executive or highly compensated employees can participate. Because there aren’t any non-discriminatory rules, you don’t have to offer this plan to every employee.
Are nonqualified deferred compensation plans a good idea?
Deferred comp and you
NQDC plans have the potential for tax-deferred growth, but they also come with substantial risks, including the risk of complete loss of the assets in your NQDC plan. We strongly recommend that executives review their NQDC opportunity with their tax and financial advisors.
What is the difference between a qualified plan and a nonqualified plan?
Qualified plans have tax-deferred contributions from the employee, and employers may deduct amounts they contribute to the plan. Nonqualified plans use after-tax dollars to fund them, and in most cases employers cannot claim their contributions as a tax deduction.