NQDC Vesting and Earnings - how to report on W-2

[JProehl]

I am trying to pin down the proper W2 reporting on deferred comp. Specifically regaring vesting and earnings on vested portions.

 

For purposes of this discussion I am assuming an employer contribution of $60,000 that vests 1/3 each year from the date of the award. I believe this would be described as an account balance plan where essentially there is an individual account for each participant. The employee account is credited with earnings as if the funds were invested in the market. Think like 70% VOO / 30% SCHD.  

 

Year 1 - $20,000 of the $60,000 award vests, but the employee is also credited with $6,500 of earnings based on the return of the whole amount. Total account value $66,500.

Year 2 - the second $20,000 of the $60,000 award vests (now 2/3 vested) plus the account is creditedvwith $8,000 of earnings. Total account value $74,500.

Year 3 - the third $20,000 of the orignal award vests (fully vested) plus the account is credited with $9,000 earnings. Total account value of $83,500.

I know that as the account vests that the amount needs to be included in FICA earnings under the special timing rule. Where I am confused is the timing of when the earnings on the account need to be included.

 

Question 1 - In Year 1 would I include $20,000 plus all the $6,500 in earning or only 1/3 ($2,167) of the earnings since the account was only 1/3 vested?

Question 2 - In Year 2, I know that again I would include the $20,000 that vests, but what do I do with the $8,000 in earnings? Obviously some portion of the earnings in year 2 is attributable to already vested and reported earnings.

 

Any help greatly appreciated.

[CuseFan]

I believe that as the earnings vest they are subject to FICA but then future earnings on vested amounts are not.

So after year 1, 1/3 of $66,500 is subject to FICA. Year 2, $74,500 x 2/3 less the original vested total from year 1 AND the applicable portion of earnings attributable thereto. Similar for year 3 on remaining piece.

[Luke Bailey]

On 12/19/2023 at 3:03 PM, CuseFan said:

So after year 1, 1/3 of $66,500 is subject to FICA. Year 2, $74,500 x 2/3 less the original vested total from year 1 AND the applicable portion of earnings attributable thereto. Similar for year 3 on remaining piece.

JProehl, I will elaborate a little on what CuseFan means by "original vested total from year 1 AND the applicable portion of earnings attributable thereto" means, In other words, for the second year, the earnings on the entire $22,166.66 that vested at end of Year 1 is not subject to FICA. Similar concept for third year.

[CuseFan]

Thanks Luke, I tend to get short and cryptic when doing seven things at once!

[Luke Bailey]

1 minute ago, CuseFan said:

Thanks Luke, I tend to get short and cryptic when doing seven things at once!

Don't we all, CuseFan.