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Withholding on NQDC Paid by Third Party


ERISA-Bubs

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We have a nonqualified deferred compensation ("NQDC") plan. A retiree is due to start receiving payments this year. We currently have the funds invested in a third party service provider who will be making the payments to the reitree. I understand we, as the former employer, are supposed to report this on a Form W-2 because the NQDC was earned as an employee. But how do we handle withholding since it will not be paid from our payroll?

Should the third party withhold and report on a 1099?

Should we ask the third party to pay us so we can process through payroll (this is NOT what we want to do if we don't have to)?

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I'll take a stab at this. Just my hunch:

The third-party service provider is exactly that: third-party, not part of the original employment or NQ relationship. The responsibility for upholding the terms of the plan, and for tax withholding belongs to you, as the (former) employer, not to the external vendor. Thus, you should do whatever is necessary to make sure withholding is applied properly. If that means you run it thru your payroll, go ahead. (BTW, logistically, this should not be difficult.) Just make sure you don't inadvertently make this person an "active employee" for any other payroll-generated purposes.

I'm a retirement actuary. Nothing about my comments is intended or should be construed as investment, tax, legal or accounting advice. Occasionally, but not all the time, it might be reasonable to interpret my comments as actuarial or consulting advice.

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  • 1 year later...

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