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The Terms Of Your Company’s NQDC Plan: What You Can Expect (Part 2)

Part 1 of this article series presented findings in a survey by my firm, the Ayco Company, on participation eligibility, the income that is eligible for deferral under a nonqualified deferred compensation plan, and the timing of deferral elections. This article gives our findings on investment choices, the form and timing of distributions after the deferral period, and your scope for making changes in elections. It also explains the tax withholding and reporting for distributions.

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Key Points in This Article
NQDC plans generally offer fewer investment choices than 401(k) plans, but most companies do offer an earnings or crediting rate based on one or more mutual funds. For payouts, most plans let you choose between a lump sum and installments.
While Section 409A allows the modification of deferral elections, the rules are strict and the penalties stiff. In fact, to avoid 409A problems, over a third of the surveyed companies will not let you change payout elections made under their NQDC plans.
When you consider the tax reporting and filing for NQDC, don't forget to consider the FICA tax due at the time of deferral, or the state tax that may be due at the time of payout.