Loans from NQDC

[wingCPA]

Hi everyone,

I have a client with a closely held c-corporation who is deferring most/all of his income into a NQDC plan. The earning that are put aside/"invested" for him are currently put in an index fund. However, he would like to have the NQDC fund lend him money. I feel like this would not workout in an audit, but he has consulted with a tax attorney who states that the NQDC plan is making him a loan with interest/principal to be paid as lump sum in the future (20 years from now) similar to a mortgage. I feel as though this is more a scheme and will not work in the best interest of the client.

[CaliBen]

Cannot take a loan from a non-qualified DCP. Possibly the plan document provides for early distribution in the event of an unforeseeable emergency.

Other options - reduce or eliminate deferrals for the next plan year.

Find another source of funds - bank loan, 401k loan, loan from employer etc.

 

[Luke Bailey]

The regulatory underpinning for wingCPA's response is 1.409A-3(f), re "Substutions."

Would be interested to know how closely held the company is. There is a question as to whether deferred comp works in a situation where the exec owns 100% of the company and there is no effective restraint on access to funds.