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Nonqualified deferred compensation income characterization


Guest cubbietax

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Guest cubbietax

I am looking for some authority for a basic provision.

In a nonqualified deferred compensation arrangement, the deferred compensation typically gains an "interest equivalent" during the deferral period. It is my contention and the contention of those that I have spoken with that this "interest equivalent" is actually additional compensation and not interest. The characterization of the inocme is important in my situation.

I am looking for authority that backs up this proposition.

Thanks for the help.

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For purposes of applying the federal income tax, it most certainly is "compensation" (i.e., Section 3401 "wages").

For FICA/Medicare tax purposes, earnings/interest accrued after the deferred compensation becomes vested are not wages subject to those taxes.

For what purpose are you asking?

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Guest cubbietax

Thanks for the response. I agree with the analysis of the income and social withholding analysis.

It is an issue because of nonresident alien income. If it is interest then I am stuck with the interest sourcing rules. If it is compensation then I get to source it based on workdays.

Cubbietax

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see reg. 1.61-11 pensions and Rev. rule 60-31 for authority that deferred compensation is wages because it is paid for services rendered to the employer. Also see reg 1.404(a)-12 for deduction of deferred comp in year emplyee includes it a compsneaton. There is no provision for payment of earnings on deferred comp to be treated as interest.

mjb

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Guest cubbietax

Thanks for the assistance.

The Albertson's line of cases worries me some because the 9th circuit said that this type of payment was interest, but was overruled by the 9th circuit a year later. However, the 9th circuit in overruling itself said that they did not care if it was interest or not.

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Look at it this way, in an economic sense, it most certainly is "interest:" payment of the compensation is being deferred, so the employee is entitled to "interest."

However, at least for certain tax purposes, it is "compensation;" specifically, "deferred compensation."

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The Albertson cases never discussed the taxation of the earnings to the employee. The question was whether the employer could deduct the imputed earnings on the deferred comp each year as they were earned rather than when the deferred comp and earnings was paid to the employees. The Second Albertson's case held that the interest portion was deferred comp as well as the amount of deferred compensation because deferred comp is not deducted until it is included in the employees income under IRC 404(a)(5).

mjb

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