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Can our subsidary pay our NQDC obligation?


ERISA-Bubs

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We have a subsidary that is holding some units of another company. We want to allow an executive of the parent to "purchase" those units with his nonqualified deferred compensation balance. When he retires, we plan to just have our sub give him the units.

If the NQDC obligation is satisfied this way, how does taxation work?

We would like the parent to still issue a W-2 and take a deduction upon payment. Is this an issue since the units are being provided to the executive through the subsidiary?

Unfortunately, we can't transfer the units to the parent and provide them to the executive through the parent because, in this case, the parent is prohibited from owing these particular units.

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There's a lot to unpack here. Is a plan already in place under which the executive has a balance? The terms of the plan will matter as well. Does he have a 409A-covered NQDC plan with the parent? If so, not positive, but you may need to worry about change in form of payment rules if the current plan provides cash payments. All NQDC "plan assets" have to remain assets of the employer until paid, so he can't really "buy" the units with his NQDC plan balance; he could only hypothetically invest in them. If you resolve everything else and he's ultimately given property to satisfy his NQDC payments, I would think section 83 would apply.

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EBECatty -

There is already a NQDCD plan with the parent under which the executive has a balance, but it allows for this, so that is not an issue here. We were careful in designing the plan to make it clear the executive doesn't own the shares until they are transferred to him upon the payment date--he is an unsecured creditor.

The main issue here is that the Sub holds the shares and that when it's time to pay him out under the NQDC plan, the shares will be coming from the Sub. So, should the exec receive a W-2 from the parent (who maintains the plan) or a 1099 from the Sub (who is paying the balance)?

Thank you!

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  • 2 weeks later...

Although I've never encountered this exact situation, the Section 83 regulations address a few of these issues. 1.83(a)-1(a)(1) gives consistent tax treatment to the employee regardless of whether the transferor (here, the sub) is the recipient of the employee's services. Section 1.83-6 governs the deduction, with (a)(1) saying the service recipient gets the deduction. There's no mention of services performed for another.

Section 1.83-6(d) lays out rules for the treatment in the opposite context, i.e., parent gives sub employee parent stock for services rendered to sub, but I don't see the treatment anticipated here. Under a literal reading of the regs, it sounds like the parent would still get the deduction, but I'm not positive that's the right outcome.

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