Non-qualified profit sharing plan

[Guest natasa]

Does employer have any tax advantages if paying employee their share from the company profit in a form of cash, stocks or check as soon as the profit is determined (current/cash profit sharing plan)? I know employee is taxes immediately when receiving such payment. I read somewhere that contributions to a non-qualified plan are currently deductible by the employer, whar does this mean? I thought that employer doens't have any tax advantages if the plan isn't deffered.

Thank your for your answer.

[J Simmons]

A basic concept of the US tax code is that an employee is taxed on value (economic benefit) earned when no longer subject to a substantial risk of forfeiture, and at that time, the employer is allowed a deduction provided it is an 'ordinary and necessary business expense' considering the entire compensation package.

A qualified plan breaks apart the timing, allowing the employer a deduction when contributions are made but postponing the employee's taxation until later when withdrawn. That's the advantage gained from complying with the minimum coverage, nondiscrimination and other rules applicable to qualified retirement plans.

A nonqualified plan does not break apart the timing. The employer will get a tax deduction when the amount in question is includible in the employee's taxable income. However, the nonqualified plan seeks to manipulate that timing. The employer might be willing to wait years for its deduction, to the time when the employee will have taxable income. In other, rare situations, the design might be to trigger the taxable events sooner rather than later.

IRC sec 409A was passed in October 2004, among other things, to try to cause that taxation to occur when the employee first has significant power to affect the timing of the payment (i.e., the taxation of it as income to the employee and correspondingly the tax deduction to the employer).

[Guest natasa]

Sorry to bother you after such a long time. First thanks for really quick answers. I would just like to ask you if you could explain me once again the thing with the employer tax deductions, timing and non qualified profit sharing plans. What does it mean that the employer might be willing to wait on its tax deduction for years - till employee doens't reach taxable income (I assume the employer pays his employee such a low income that employee doen't reach the minimum income that is taxable). Why would he want to do that? isn't it in his interest to be able to make tax deduction from his contribution in a form of cash, stock... that he pays to the employee in a form of monthly, yearly... payments to his wage if the company reaches a profit wright away?

I hope my writing is making any sense. Sorry, but your tax system is so complex for me that I'm having big difficulties to understand it.

Thanks for your help.

Natasa