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Tax Reporting on 409a/NQDC


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A client wants to set up a funded 409a Top-Hat/SERP Plan for executives with participant direction. As I look for a provider that offers this, I wonder about any tax reporting requirements. The funds remain an asset of the employer until distribution and are in an investment account. Do the earnings on that account need to be reported as they have increased the value of the employer's assets? Or is their an exemption for a 409a Plan? Thank you in advance.

ERPA, QPA, QKA

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By "funded", I assume you mean "informally funded" and that the assets are not actually set aside and guaranteed to pay benefits.  Since they are merely earmarked to pay benefits, they are accounted for no differently than any other corporate asset.

 - There are two types of people in the world: those who can extrapolate from incomplete data sets...

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Yes. The company "allocates" a certain amount to certain executives each year, sends the money to the custodian and allows the participants to choose the investments on a daily-recordkeeping platform (just like a 401k). Doesn't the Rabbi Trust guarantee the payments (except for bankruptcy)? But yes, I agree it is a corporate asset. Is there some tax reporting that the custodian of that account need to do?

ERPA, QPA, QKA

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1 minute ago, Gadgetfreak said:

Yes. The company "allocates" a certain amount to certain executives each year, sends the money to the custodian and allows the participants to choose the investments on a daily-recordkeeping platform (just like a 401k). Doesn't the Rabbi Trust guarantee the payments (except for bankruptcy)? But yes, I agree it is a corporate asset. Is there some tax reporting that the custodian of that account need to do?

Rabbi trusts are subject to the claims of the company's general creditors and by design do not guarantee that payments will be made. Otherwise, the economic benefit and constructive receipt doctrines would apply.  

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Point taken. So yes, since bankruptcy and creditors prevent payment, they can't be considered guaranteed. I misspoke. But, if informally funded and part of the employer's general assets, I assume the employer must pay income tax on any earnings attributable to those allocated funds. If so, does the custodian of the account provide the necessary tax reporting?

ERPA, QPA, QKA

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Yes. Essentially the corporation is investing its assets in investments chosen by the NQDC participants. Taxable investment earnings should be reported out under the corporation's EIN and included in its taxable income. If assets are in a rabbi trust then I'm not sure if it's the trust itself that has a tax liability or the corporation - but there is no tax deferral/deduction for the company until there is taxable income to the employee.

Kenneth M. Prell, CEBS, ERPA

Vice President, BPAS Actuarial & Pension Services

kprell@bpas.com

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21 hours ago, Gadgetfreak said:

Point taken. So yes, since bankruptcy and creditors prevent payment, they can't be considered guaranteed. I misspoke. But, if informally funded and part of the employer's general assets, I assume the employer must pay income tax on any earnings attributable to those allocated funds. If so, does the custodian of the account provide the necessary tax reporting?

Yes, all tax consequences flow back to the grantor.  The custodian should provide the necessary tax reporting (1041) to the grantor to be able to file the appropriate taxes. 

 - There are two types of people in the world: those who can extrapolate from incomplete data sets...

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  • 4 months later...

I have a client with a NQDC and the participant has been issued a Form 1099 each year for the investments. This is not correct, is it?? So this should go to the employer to consider on their corporate return??

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What's being reported?  Taxable income, new deferrals or balances? Which box is the information being shown in?  409A did mandate informational reporting that has been suspended since 2008 (and was not required before that), and I have heard of at least one provider who was reporting the balance for a while (incorrectly it turned out).

 - There are two types of people in the world: those who can extrapolate from incomplete data sets...

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