Blog Tag: nonqualified deferred compensation plans
Baby Boomers are beginning to retire, creating a more competitive hiring market. In order to attract and retain top talent, employers need to offer more than just an enticing base salary and job title. Attractive benefits are (and will continue to be) a crucial part of a company’s ability to hire and keep key executives. In fact, certain benefits can have perks for both the employer and the executive. Nonqualified deferred compensation, when used correctly, is a planning solution that can be mutually advantageous.
On December 20, 2017, Congress enacted a far-reaching tax reform package called the Tax Cuts and Jobs Act (“the Act”). The good news is that the current law permitting nonqualified deferred compensation plans (NQDCPs), including Code Sections 409A and 457, was preserved. Many of the Act’s provisions affecting individual taxes are not permanent and are scheduled to expire after December 31, 2025, unless a future Congress acts to extend those provisions.
The importance of following the requirements of Internal Revenue Code §409A (409A) was discussed in the Fall 2015 SilverLink magazine article, “Planning by the Rules.” Since that article was published, the Internal Revenue Service (IRS) issued Internal Revenue Code §409A Proposed Regulations, clarifying and modifying the existing and final 409A regulations with regard to deferred compensation. These proposed regulations include 19 technical clarifications, most of which will not affect the core 409A regulations.
Financial and tax planning considerations, including increases in tax rates, are creating a renewed interest in the use of nonqualified deferred compensation plans.
A properly structured nonqualified deferred compensation plan allows a participant to postpone the payment of income tax on the amount deferred until the plan payment occurs, which typically happens at a participant’s separation of service or retirement. However, the exception to tax deferral is the Federal Insurance Contributions Act tax, commonly known as FICA tax. As nonqualified deferred compensation plans grow in popularity, it is important that employers understand FICA taxes and how they might impact these plans.