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2023 Deferred Compensation Plan (Business)



Overview Deferred compensation plans provide options for highly compensated individuals to defer receipt of some compensation until a later time. They are commonly referred to as nonqualified deferred compensation plan, NQDC plan, and supplemental executive retirement plan.


Do I Qualify for the Deferred Compensation Plan (Business)? To qualify for benefits from a deferred compensation plan, the business must be able to make contributions to an employee account and include those payments as gross income for the employee.


2023 Deferred Compensation Plan (Business) Details A non-qualified 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. NQDC plans provide employers and employees with different tax benefits than the qualified plans that meet all the requirements listed in IRC § 401(a). Under a non-qualified plan, employers generally only deduct expenses for tax purposes when income is recognized by the employee or service provider. The primary tax benefit that distinguishes qualified plans from NQDCs is the current-year deductibility of employer contributions to qualified plans. Nonetheless, NQDCs offer advantages in terms of flexibility in the timing and amounts of contributions.


NQDC plans typically encompass four categories:

  1. Salary Reduction Arrangements - Allow employees to defer receipt of a portion of the salary that would otherwise be included in current compensation.

  2. Bonus Deferral Plans - Resemble salary reduction arrangements but enable participants to defer receipt of bonuses.

  3. Top-Hat Plans (aka Supplemental Executive Retirement Plans or SERPs) - NQDC plans maintained primarily for a select group of management or highly compensated employees. These are usually some form of additional compensation that the employer agrees to pay the employee in the future, rather than a deferral of salary.

  4. Excess Benefit Plans - NQDC plans that provide benefits solely to employees whose benefits under the employer's qualified plan are limited by tax law.

Most NQDC plans are intended to be unfunded due to the tax advantages they provide to participants. If the assets are segregated in a manner that protects them for the employee’s exclusive benefit, the employee may have currently includible compensation.


Benefits

  • Reduces the employee’s current taxable income.


Considerations

  • A third-party financial advisor will need to be involved in this transaction.

  • Assets used to fund the obligation are unprotected from creditors in the event of insolvency.

Assumptions When Taking the Deferred Compensation Plan (Business) N/A


Requirements to Claim the Deferred Compensation Plan (Business)

  • A written plan must be completed.

  • Any assets intended to fund the future obligation cannot be protected from the employer’s creditors for the exclusive benefit of the employee.


Business Entities That Can Claim the Deferred Compensation Plan (Business)

  • Schedule C

  • Schedule F

  • S Corporation

  • C Corporation

  • Partnership

In summary, the Deferred Compensation Plan, commonly known as the NQDC plan, offers a strategic financial tool for highly compensated individuals and businesses. Designed to cater to the unique requirements of top-tier employees and executives, the plan provides them the flexibility to defer their compensation to a later date, granting them potential tax benefits. While the plan showcases advantages in terms of tax timings and contribution amounts, it is imperative for businesses and individuals to understand the intricacies, especially regarding the tax implications and creditor vulnerabilities. As we transition into 2023, it's essential for businesses and professionals to consult with financial advisors to harness the plan's full potential and ensure compliance with all requirements. Such foresight not only safeguards one's financial interests but also optimises the benefits derived from the NQDC plan.

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