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Mechanics of NQDC Distribution


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First of all, I want to thank all of the great resources on this board for answers as we are trying to set up our NQDC plan.    It appears that we are moving toward an account balance type plan with either a limited menu of investments or something that mirrors our 401k plan.  We are either going to use an outside broker to hold the accounts or possibly our 401k plan administrator.

I am looking down the the road at the eventual distributions.  I know that they are supposed to be reported on a W2 to the employee.  I am really trying to understand the mechanics of the distribution if we use the 401k company. 

Do the custodian send the funds to the company and then we send to the former employee?  I have heard some nightmare issues regarding participants getting both 1099s and W2s and then it looks like the income gets double reported.

As I understand it, the proper procedure is that we would report Box 1 wages, nothing in Box 3,5 as the FICA should have already been paid under special timing and the report a Deferred comp amount in Box 11.

Am I basically on the right track?

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It is a nightmare.  I work for a recordkeeper, and we do it both ways (but my preference (from a semi-compliance, semi-legal position) is that the money go to the employer to be processed and a W-2 issued in due course.  This has the advantage of ensuring all the correct holding is done, per the W-4 on file, and any state or local taxes are handled properly.  We do issue W-2's (for business where we custody assets - in a group annuity way) and Matrix Trust Company can issue W-2's for assets held in a trust, but 1) it uses only defalt withholding rates, and 2) occasionally a 1099 is issued, which then has to be corrected.  I will tell you as well, because the participant may request a rollover (not available for these), the "factory" will process a rollover, and then it get's even more interesting.  Best bet, pay the employer to pay the participant.

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Whichever course you choose, consider engaging a service provider that, like MoJo's employer, has an inside lawyer who understands the issues and potential failure points.

Peter Gulia PC

Fiduciary Guidance Counsel

Philadelphia, Pennsylvania

215-732-1552

Peter@FiduciaryGuidanceCounsel.com

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Generally I understand all of this.  I am still a bit unclear about some of the W2 reporting.

In the year of vesting, it appears that I need to report any vested amounts plus earnings in Box 11 in addition to adding it to Box 3,5.

If there is a distribution only, that is reported in Box 11, adding to Box 1.

However it there is vesting along with a distribution, you would report that on SSA-131.

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