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Year-End Insights & Updates, October 17, 2013

At myNQDC.com, we keep our articles and FAQs current right up to the minute, with important updates and practical additions on key topics in nonqualified deferred compensation. Recent enhancements include ideas and strategies for NQDC-related financial planning after the tax increases that took effect this year. Below we outline major additions and updates at myNQDC.com during the past few months.

Top Issues To Consider When Making Salary Deferrals Into Your Nonqualified Plan For 2014

As the tax rules require next year’s NQDC deferrals to be elected before the current year ends, many plan participants are now making decisions about their deferrals for 2014. In fact, the fourth quarter is the most common period in which companies require NQDC participants to make salary deferral elections for the year ahead. In 2013, one new development is the need to consider this year’s tax increases, including the Medicare surtax on investment gains (these tax hikes were still uncertain at the end of 2012). Issues to consider in your decision-making at enrollment include the following.

1. Maximizing the amount you can contribute to your 401(k) plans. You should participate in the NQDC plan only if you can also afford the maximum annual contributions to your qualified deferral plans, as those are fully funded and protected by ERISA.

2. Cash needs for the year ahead and multi-year projections for your income. At a minimum, these considerations will tell you whether you have extra cash to defer. Your cash-flow projections should factor in all sources of income, including equity compensation, against spending needs in the near future to help you decide how much to defer.

3. The financial security of your company, and your job security. If you have concerns about your company’s solvency, you may want to avoid contributions to nonqualified plans because of the risks presented by corporate bankruptcy. Any potential for job loss may also make NQDC deferrals unwise. If you lose your job during the deferral period, the income in the plan will be distributed to you immediately, triggering taxes you may not want to pay at that time.

4. Company match. Though company matches are not as common in NQDC plans as they are in 401(k) plans, if a company match requires you to contribute a certain amount to your NQDC plan, you will need to consider deferring at least that minimum.

5. The thresholds for higher taxes and rates. Higher tax rates make deferring income appealing. Consider whether the tax rate at the time of…

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Selected New & Updated FAQs

In a corporate bankruptcy, what will happen to my NQDC plan and my distributions?

Sometimes, though rarely, NQDC plan participants can retain some nonqualified benefits after a corporate bankruptcy. For example, with executive retirees of General Motors who have a combined tax-qualified and nonqualified benefit in excess of $100,000 per year, amounts over that threshold are reduced by two thirds. (See a blog commentary on this topic by Mike Melbinger, a member of the myNQDC.com Advisory Board.) At Eastman Kodak, executives will also receive 4%–5% of their earned but deferred salaries and incentive awards in the form of the new Kodak’s common shares, which will be issued when the company emerges from Chapter 11. (A commentary at The myStockOptions.com Blog discusses the details of Kodak’s NQDC history and explains lessons about nonqualified plans that can be learned from the company’s bankruptcy.)

Is there any way to guarantee I will receive my money and yet still defer taxes?

In addition to other means, credit default swaps can provide an indirect way to cover the value of your NQDC plan.

Are NQDC plans affected by the Supreme Court’s ruling on marriage equality?

This ruling does affect NQDC plans, though somewhat indirectly, as changes in nonqualified plans will flow from the rules for qualified plans. In general, companies will also want their definitions of spouse and married to be consistent across all benefit and compensation plans.

What is the tax treatment for nonqualified defined benefit plans, such as SERPs?

A court decision this year demonstrated the need for companies to follow the FICA tax-timing rules if they want to avoid the risk of liability. If your former employer does not follow these rules, the company will be required to withhold Social Security and Medicare taxes on each future benefit payment to you rather than on a one-time basis. The Social Security tax (6.2%) is therefore applied each year up to the applicable wage base.

What are the penalties if my NQDC plan violates Section 409A?

In addition to the federal penalty and extra federal tax you must pay if your company’s NQDC plan violates Section 409A, California residents also face a state income-tax penalty. The state just reduced this penalty from 20% to 5%.

Learning Center Offers 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.