Insights & Updates, June 12, 2013

At myNQDC.com, we continue to enrich our content with crucial updates and practical new articles and FAQs about key NQDC topics, including the impact of the tax increases that took effect this year. Below we outline major additions and updates at myNQDC.com during the past few months.

Articles Dissect The Impact Of 2013 Tax Changes On NQDC

At myNQDC.com, four articles examine the impact of recent federal tax changes on your planning for nonqualified deferred compensation:

• NEW! When Higher Tax Rates Make Nonqualified Plans More Attractive, by William L. MacDonald. This article considers whether the 2013 tax changes have increased the appeal of NQDC plans, looks in number-crunching detail at the pros and cons of a lump-sum payout versus installment distributions, and warns about tax problems that can arise from certain features of NQDC plan design.
• NEW! Four Nonqualified Plan Trends To Watch With Tax Rate Increases, by Michael Nolan. After explaining why the timing for NQDC plans could not be better, the author pinpoints trends involving income deferral that are likely to gather pace in the new tax and financial-planning environment.
• NEW! Tax Increases That Affect Your Planning For Nonqualified Deferred Compensation, by Bruce Brumberg. The capacity for tax-planning and income-shifting is one of the main benefits that make nonqualified plans appealing. When tax rates increase, the advantages of NQDC plans also grow. In this article, the author explains the various tax changes that affect NQDC planning.
• UPDATED! Advantages To Pre-Tax Deferral Of Income In An Uncertain Tax Environment, by Steve Broadbent and Chris Nyland. Learn how to consider recent and future tax-rate changes and investment returns when analyzing whether to participate in your company’s NQDC plan. The authors’ analysis compares deferred compensation to the after-tax investment of the same money. When tax rates rise, NQDC can perform better over the long term than a comparable personal investment account.

See also the full range of content on tax topics at myNQDC.com.

Selected New & Updated FAQs: Recent Court Cases & Tax Rulings

• NEW! Can personal creditors reach or garnish my nonqualified deferred compensation distributions? While the issue of whether all the distributions can be garnished remains open, the fact remains that you cannot rely on ERISA protections to shield NQDC payouts from creditors. A recent court decision, in Sposato v. First Mariner Bank, illustrates the point, as this FAQ explains.
• UPDATED! What if I live in a different state at distribution than the state where I worked? How is the distribution taxed? This updated FAQ includes two recent developments of interest: an Advisory Opinion from the New York State Department of Taxation and Finance that let a lump-sum NQDC payout to a former resident avoid taxation; and a written determination from the New York State Division of Tax Appeals that a nonresident retiree (always resident in Connecticut) had to allocate to New York a portion of the distributions from his deferred compensation plan.
• UPDATED! What happens to my NQDC plan in a merger or acquisition? An update to this FAQ includes a mention of Lee Gardner v. Heartland Industrial Partners (6th Cir. May 10, 2013), a recent federal circuit court case that shows the risk a corporate acquisition can pose to NQDC plans. The board of the seller declared the company’s SERP invalid after the acquiring company learned about the big SERP payout it would owe under the change-in-control provision. However, the plan participants filed a claim of tortious interference with contractual relations against the seller’s parent company and two of its principals for inducing the seller to invalidate the SERP in an effort to complete the deal, and their claim was allowed to proceed.
• UPDATED! Does ERISA apply to and protect my nonqualified deferred compensation plan? What factors are important? This updated FAQ covers another new case, Cramer v. Appalachian Regional Healthcare, which provides a further example of the four-factor test used by many courts to determine whether a nonqualified plan qualifies as a top-hat plan under ERISA.
• UPDATED! Has the likelihood of a tax audit increased? As this updated FAQ notes, a recent court ruling, in Sutardja v. United States, makes it clear that the IRS is focusing on nonqualified deferred compensation and 409A compliance in audits.

NQDC Calculator Can Help You Navigate The Planning Impact Of Tax-Rate Increases

Generally, the rise in tax rates enhances the appeal of income deferral. Each person’s situation is different, however, and you should make projections involving various factors:

• your calculation of current and future tax rates for both ordinary income, capital gains, and the Medicare surtax
• the investment return on the compensation you defer
• the growth of alternative investment(s) for the after-tax amount of the compensation without deferral

The calculator on myNQDC.com lets you model these different variables to help you make decisions about whether or not to defer income.

Learning Center For NQDC Courses And CE Credit

In the myNQDC.com Learning Center, our courses of study and exams cover several NQDC subjects. These programs offer up to 6 continuing education credits for CFPs, 6 PACE credit hours for CLU® and ChFC® professionals, and 12 CPE hours for ASPPA members. The courses are dynamic, interactive learning tools that teach NQDC topics in a memorable way. The answer key for each exam also links to relevant content on myNQDC.com for further reading and study. The courses and exams in the Learning Center can be licensed and customized.

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The Editorial Team
myNQDC.com