On June 1, 2021, the IRS officially completed its revisions to its Nonqualified Deferred Compensation Audit Technique Guide. The updated guide is a useful reminder of how very important it is for companies to maintain careful documentation and recordkeeping and of the importance of strong compliance safeguards and attention to public company disclosure with the Securities and Exchange Commission.
The full report is available here. This Deferred Compensation News update is one of several we’ll be publishing sharing well-defined explanations and answers to some of the most commonly misunderstood issues of nonqualified deferred compensation.
The Basics of Nonqualified Deferred Compensation Plans
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 compensation in the future. In comparison with qualified plans, nonqualified plans do not provide employers and employees with the tax benefits associated with qualified plans because NQDC plans do not satisfy all the requirements of IRC § 401(a).
Under a nonqualified plan, employers generally only deduct expenses the employee or service provider recognizes as income. In contrast, under a qualified plan, employers are entitled to deduct expenses in the year the employer makes contributions even though employees will not recognize income until the later years upon receipt of distributions.
Issues that arise when examining NQDC include the timing of income inclusion for the employee or service provider, the timing of the deduction for the employer or service recipient, and when deferred amounts are subject to employment taxes.
As the Guide points out, however, it is not an “official pronouncement of the law or the position of the Service and cannot be used, cited, or relied upon as such.”
This material has been prepared for informational purposes only, and is not intended to provide, and should not be relied on for, accounting, legal or tax advice. Any tax advice contained herein is of a general nature. You should seek specific advice from your tax professional before pursuing any idea contemplated herein.
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