Distributions to employees from nonqualified deferred compensation plans are considered wages subject to income tax upon distribution. Since nonqualified distributions are subject to income taxes, these amounts should be included in amounts reported on Form W-2 in Box 1, Wages, Tips, and Other Compensation.

What is non-qualified tax-deferred?

A nonqualified plan is a type of tax-deferred, employer-sponsored retirement plan that falls outside of Employee Retirement Income Security Act (ERISA) guidelines. These plans are also exempt from the discriminatory and top-heavy testing that qualified plans are subject to.

Should I participate in a nonqualified deferred compensation plan?

NQDC plans allow corporate executives to defer a much larger portion of their compensation, and to defer taxes on the money until the deferral is paid. You should consider contributing to a corporate NQDC plan only if you are maxing out your qualified plan options, such as a 401(k).

Is nonqualified deferred compensation subject to Social Security tax?

Amounts deferred under a NQDC plan are subject to both a “special timing” rule and a “non-duplication” rule for FICA purposes. The social security portion of FICA tax is only imposed on wages up to the social security wage base.

What are non-qualified deferred compensation plans?

A non-qualified deferred compensation (NQDC) plan allows a service provider (e.g., an employee) to earn wages, bonuses, or other compensation in one year but receive the earnings—and defer the income tax on them—in a later year.

Do I have to pay Social Security tax on deferred compensation?

The Social Security and Medicare tax (FICA on your W-2) is paid on compensation when it is earned, even if you opt to defer it. Thus, $42,100 of total compensation for the year is not subject to the FICA tax. When the deferred compensation is paid out, say in retirement, no FICA tax will be deducted.

How does the nonqualified deferred compensation plan work?

How much annual income you’d like to replace with deferred comp plan benefits. This is the age you plan to receive benefits from the nonqualified deferred compensation plan. It is used to calculate how many years you have to save and when you will begin receiving income from the deferred comp plan.

What do you need to know about deferred comp?

Must be greater than your Start receiving deferred comp age. This is the number of installments you plan to receive benefits from the deferred compensation plan. It indicates how many years you wish the plan to provide for before drawing funds from qualified retirement accounts.

Do you have a non qualified distribution plan?

Read Viewpoints on Fidelity.com: Non-qualified distribution investing and Distribution strategies delve into how to approach those decisions. But before you tackle these issues, you must first decide whether to participate in your company’s NQDC plan at all.

Can you withdraw from a deferred compensation plan before age 59½?

No, but job separation and other events can trigger distributions before that age. In some cases, it may be possible to take an Unforeseeable Emergency withdrawal if the plan allows for it Yes, but only upon separation from service; a 10% additional tax may apply if under age 59½.