For example, participants would be eligible to receive a distribution from their nonqualified deferred compensation plan
only if they separated from service from all of the entities in their former employer's controlled group.
Unlike most nonqualified deferred compensation plans
, there is no immediate taxation at the time that risk of forfeiture terminates.
409A(d) treats as a "nonqualified deferred compensation plan
" every arrangement of compensation deferral unless it is specifically excluded.
If a severance pay plan does not meet the ERISA "pension plan" exemption described above, it will be treated essentially as a nonqualified deferred compensation plan
for ERISA purposes.
Participants in a nonqualified deferred compensation plan
can change their distribution selections in 2008 to match their long-term personal financial goals.
The only part of the law that requires actual termination of employment is the portion governing distributions from nonqualified deferred compensation plans
maintained solely for the purpose of providing benefits in excess of certain IRC limitations.
Therefore, if a nonqualified deferred compensation plan
is maintained for the purpose of providing benefits for a select group of management or highly compensated employees, it will be exempted from all ERISA requirements except for certain streamlined reporting and disclosure requirements (a statement need be filed only at the plan's inception date).
However, failure to treat compensation from NQSOs or amounts deferred under a nonqualified deferred compensation plan
as subject to FICA is not considered a reasonable, good-faith interpretation of the rules.
Under IRC section 404(a)(5), contributions to a nonqualified deferred compensation plan
are deductible in the tax year the contribution is includible in the gross income of the employees participating in the plan.
Amounts deferred under a nonqualified deferred compensation plan
are subject to FICA when the services are performed or when the deferred amount is no longer subject to a "substantial risk of forfeiture." Typically, amounts deferred under an unfunded nonqualified arrangement will not be forfeitable.
The annuity in Webb came from a nonqualified deferred compensation plan
. The buyer anticipated it eventually would freeze the benefits under an existing defined benefit plan and add a profit-sharing plan.
In January 1996, the Internal Revenue Service gave employers and practitioners a belated holiday gift in the form of long-awaited guidance on the Social Security tax treatment of amounts deferred under a nonqualified deferred compensation plan
. Proposed regulations under section 3121(v) of the Internal Revenue Code clarify many of the concepts involved in the determination of the taxability of these amounts.