JProehl

Thanks to all in this forum for their help as I bumble through our NQDC plan. We are approaching the first vesting cliff at the end of this year. The vesting occurs basically at 12/31/2025. Since the value of the plan is based on underlying investments and not a fixed interest rate and could move quite a bit by year end, I plan on using the Lag Method to report the FICA earnings. I anticipate this will be run through payroll around the end of January or more likely the end of first week of February. I know that for the Lag Method, I have to report not only on the vested balance but also add interst to the vested amount. From what I have read the amount must be increased by interest through the date on which the wages are treated as paid, at a rate that is not less than the January Mid-Term AFR . ILLUSTRATION For purposes of illustration, assume that an original award of $50,000 several years ago is valued at $62,000 as of 12/31 based on credited earnings. Vesting will be credit on paydate 2/7/2026. Mid Term January AFR rate is 3.8% Calculation Vested Amount at 12/31 - 62,000 Multiplied by AFR Rate - 3.80% Equal Annual Interst - $2,356 Multiplied by Days until Reported / 365 days in year - 38/365 = .1041 - 31 days in January plus 7 days in February until paydate Equals Interest to be added to Vested Amount - $245.28 Vested Amount ($62,000) plus Interest ($245.28) = $62,248.28 = Total Amount subject to FICA 1) Is my understanding of the Lag Method correct? 2) Does my method of calculating interest make sense? Thank you as always for any guidance and feedback.

I am trying to pin down the proper W2 reporting on deferred comp. Specifically regaring vesting and earnings on vested portions. For purposes of this discussion I am assuming an employer contribution of $60,000 that vests 1/3 each year from the date of the award. I believe this would be described as an account balance plan where essentially there is an individual account for each participant. The employee account is credited with earnings as if the funds were invested in the market. Think like 70% VOO / 30% SCHD. Year 1 - $20,000 of the $60,000 award vests, but the employee is also credited with $6,500 of earnings based on the return of the whole amount. Total account value $66,500. Year 2 - the second $20,000 of the $60,000 award vests (now 2/3 vested) plus the account is creditedvwith $8,000 of earnings. Total account value $74,500. Year 3 - the third $20,000 of the orignal award vests (fully vested) plus the account is credited with $9,000 earnings. Total account value of $83,500. I know that as the account vests that the amount needs to be included in FICA earnings under the special timing rule. Where I am confused is the timing of when the earnings on the account need to be included. Question 1 - In Year 1 would I include $20,000 plus all the $6,500 in earning or only 1/3 ($2,167) of the earnings since the account was only 1/3 vested? Question 2 - In Year 2, I know that again I would include the $20,000 that vests, but what do I do with the $8,000 in earnings? Obviously some portion of the earnings in year 2 is attributable to already vested and reported earnings. Any help greatly appreciated.

Using my example above in 5 years the account plus credited earnings is worth $58,019 - that is reported on the W2. In year 6 another $10,000 contribution vests. Also in year 6 the total account earns $3,400 - $500 of which is related to the current year vesting and $2900 of which is related to the prior vested and earnings. Am I thinking correctly that the earnings have to be allocated between the prior reported and the current vesting?

I feel like I am the kid going to the first day of school in looking at setting up this non qualified plan. But I am also quite aware of the many pitfalls and trying hard not to step in them and cause problems down the road. We are looking at setting up plan that has a discretionary employer contribution and also allows the employee to defer a portion of their pay. I am confused a bit by the IRS W2 directions because they do not seem to indicate any reporting in Box 12 Y for employee deferrals. From the NQDC Reporting Example chart in the IRS Publication "Example 1—Deferral, immediately vested (no risk of forfeiture). Regular wages: $200 Defer, vested: $20 Employer match, vested: $10 Box 1 = $180 ($200 – $20) Boxes 3 and 5 = $210 ($200 + $10) Box 11 = $0" There is no mention of Box 12 Y, yet the directions for Box 12 Y clearly indicate "Deferrals under a section 409A nonqualified deferred compensation plan"

Generally I understand all of this. I am still a bit unclear about some of the W2 reporting. In the year of vesting, it appears that I need to report any vested amounts plus earnings in Box 11 in addition to adding it to Box 3,5. If there is a distribution only, that is reported in Box 11, adding to Box 1. However it there is vesting along with a distribution, you would report that on SSA-131.

First of all, I want to thank all of the great resources on this board for answers as we are trying to set up our NQDC plan. It appears that we are moving toward an account balance type plan with either a limited menu of investments or something that mirrors our 401k plan. We are either going to use an outside broker to hold the accounts or possibly our 401k plan administrator. I am looking down the the road at the eventual distributions. I know that they are supposed to be reported on a W2 to the employee. I am really trying to understand the mechanics of the distribution if we use the 401k company. Do the custodian send the funds to the company and then we send to the former employee? I have heard some nightmare issues regarding participants getting both 1099s and W2s and then it looks like the income gets double reported. As I understand it, the proper procedure is that we would report Box 1 wages, nothing in Box 3,5 as the FICA should have already been paid under special timing and the report a Deferred comp amount in Box 11. Am I basically on the right track?

Thanks Kenneth. A little additional clarification on the W2 Reporting. In the year of vesting I would report the vested amount in Form W‐2: boxes 3, 4, 5, and 6 - would I also report this vested amount in Box 11? In the year of distribution I would report the distribution in Box 1 along with Box 11.

Thanks for the clarification on account balance vs non-account balance. I have actually contacted several attorneys working in this space, however they are not the ones that would have to handle the actual payroll reporting, and I want to make sure we get it right. So hypothetically if the employer sets aside $10,000 per year and credits it at a 5% rate of earnings with a cliff edge vesting of 5 years, in 5 years the account plus credited earnings is worth $58,019. When the employee vests, I would add 58,019 to their Social Security and Medicare wages. Each year subsequently I would add the annual contribution plus any earnings credited for the year. When the employee retires in 10 years, I would send them a W2 showing Box 1 Wages, and reporting Box 11 Nonqualifed distributions, but nothing in Box 3 and Box 5.

I am have been tasked with setting up a NQDC plan for a few key executives at our small company and it has my head spinning a bit. Basically the owners of the company want to set aside an annual discretionary amount for a few key employees. The contribution would be tied to employee and company performance. The amount is intended to be a SERP (no employee deferrals) and become available after the employee retires. Most of the target employees are 10-15 years away from retirement. We are looking at the standard clauses providing for acceleration in the event of death, disability, change in control. Also provision regarding non payment for termination for cause or going to work for a competitor. I will admit I am getting somewhat confused regarding the difference between vesting and triggering event. I have talked with a couple of folks who state that it is normal for employees to vest over a 5-10 year period. For example can 50 year old employee have a 5 year vesting schedule at 20% per year but the plan specify that payment is not made until they reach normal retirment age? My lack of clarity of over the vesting / triggering question leads me down the path of the what is the correct reporting and payment regarding payroll / FICA. I have some done some research and want to make sure we handle any issues regarding the special timing rule for FICA correctly. What the owners have in mind is to make these annual discretionary contributions, perhaps tie a return rate on the contributions to the S&P500, and pay the employee out either in a lump sum or in 3 years after retirement. The funds would be available at the later of age 65 or a separation from service (some employees may work until 67). What I think I know so far: - This would be a defined contribution SERP plan. - It would be a non account balance plan. - Distributions from the plan should be reported on a W2 and are subject to income tax when paid - If FICA is not paid according to the special timing rule, then FICA would would also be owed at the time of distribution under the general timing rule. FICA would be paid by both the employee and employer. What I am confused about and seeking guidance - The difference between vesting and triggering - When would the FICA tax be due? Does the special timing rule apply? - If the special timing rule applies, how is the amount determined? - What am I not thinking about that I should be?