NQDC for governmental employer

[Guest Katharine Jungkind]

I am working with a governmental employer who is considering establishing a top hat plan to benefit certain management. The problem is that they want the plan to be vested before it is payable, for instance that it vest at age 50 but not be payable until age 65. Therefore, no substantial risk of forfeiture. Can the plan have a "gross-up" provision that states that if contributions are taxable then the plan will immediately distribute the amount necessary for the beneficiary to pay any tax? I understand that the earnings in the plan are taxable when paid, not when earned, notwithstanding the taxable nature of the contributions.

[Carol V. Calhoun]

It can under federal law, although you need also to look at applicable state and local law. Barring some problem in state or local law, the usual problems you run into are more political than legal. Because the deferred amount will be shown as current W-2 income, you have to consider whether the total amount shown on the individual's W-2 will trigger news stories suggesting that s/he is overpaid, that the employer is wasting money, etc. In that sort of environment, the difference between current compensation and deferred compensation shown on a current W-2 may not be obvious to the general public.