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Archive for Non-Qualified Deferred Compensation

Corporate Executive Compensation Compliance: Unfunded Vs. Funded (Part I)

A nonqualified deferred compensation (NQDC) plan is an elective or non-elective plan, agreement, method, or arrangement between an employer and an employee (or service recipient and service provider) to pay the employee or independent contractor compensation in the future. In comparison with qualified plans, NQDC plans do not provide employers and employees with the tax benefits associated with qualified plans because NQDC plans do not satisfy all of the requirements of IRC § 401(a).

Under a nonqualified plan, employers generally only deduct expenses when income is recognized by the employee or service provider.  In contrast, under a qualified plan, employers are entitled to deduct expenses in the year contributions are made even though employees will not recognize income until the later years upon receipt of distributions. Read more

Non-Qualified Deferred Compensation: When Can You Make Distributions? (Part 2)

As I noted in my previous post, the NQDC statute specifically states there are six events when a NQDC plan can make a distribution, one of which is when the service provider “separates from service,” which is defined in the Treasury Regulations as:

An employee separates from service with the employer if the employee dies, retires, or otherwise has a termination of employment with the employer.

As with other aspects of this statute, there is little room for a liberal legal interpretation of the definition.

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Non-Qualified Deferred Compensation: When Can You Make Distributions?

Section 409A contains a very strict set of times when a NQDC plan can make distributions. They are:

(i) separation from service as determined by the Secretary (except as provided in subparagraph (B)(i)),
(ii) the date the participant becomes disabled (within the meaning of subparagraph (C)),
(iii) death,
(iv) a specified time (or pursuant to a fixed schedule) specified under the plan at the date of the deferral of such compensation,
(v) to the extent provided by the Secretary, a change in the ownership or effective control of the corporation, or in the ownership of a substantial portion of the assets of the corporation, or (vi) the occurrence of an unforeseeable emergency. Death (iii) and a specified time (iv) are not legally debatable; they simply are. Read more

Non-Qualified Deferred Compensation: The “Substantial Risk of Forfeiture” Requirement

Income for tax purposes is defined in the broadest possible terms.  §61 states it as “income from whatever source derived.”[1]  The case law adds further clarification and detail. Glenshaw Glass defined income as “undeniable accessions to wealth, clearly defined, and over which the taxpayers have complete dominion.”[2]  The latter term is central to a properly structured non-qualified deferred compensation (NQDC) plan.  If the taxpayer has any control over the plan’s income, he will have to include the total income in his annual income.

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Non-Qualified Deferred Compensation: Additional Definitions

In this post, I’ll take a look at several more definitions related to non-qualified deferred compensation (NQDC) plans, beginning with the definition of “plan:”

“The term plan includes any agreement, method, program or other arrangement, including an agreement, method, program or other arrangement that applies to one person or individual.”[1]

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Non-Qualified Deferred Compensation: Timing and Constructive Receipt Issues

It’s doubtful that anybody in the Financial Services industry is unaware of qualified retirement plans such as 401(k)s and IRAs.  Knowledge of them is required to pass licensing exams and every firm includes them in sales literature. Non-qualified plans (NQDC), however, are less well-known, largely because they are more complex and appeal to a far smaller group of potential buyers.  Although their application is narrower, in the right circumstances NQDC’s can provide clients with tremendous advantages.

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