Generally, deferral elections are required to be on file with the employer before the employee has a "legally binding right" to the compensation.
Election filed prior to the calendar year salary, commission and some bonuses are earned.
Later elections for certain types of contingent compensation ("performance-based" pay earned over 12 months or more, rights subject to forfeiture, etc.)
Some common provisions relating to forfeiture of benefits in unfunded deferred compensation plans include: Forfeiture provisions usually will be included only if the amounts deferred are supplemental benefits provided by the employer; normally the employee would not voluntarily defer current compensation if there is risk that he or she will forfeit those amounts (however, as discussed below, deferral plans for tax-exempt organizations often must include forfeiture provisions).
The applicable Treasury Regulations provide that an amount is not constructively received if "the taxpayer's control of its receipt is subject to substantial limitations or restrictions".
[5] The constructive receipt doctrine does not require immediate taxation when the nonqualified deferred compensation arrangement is properly structured.
1985), the court stated that "the economic benefit doctrine is applicable only if the employer's promise is capable of valuation", and "a current economic benefit is capable of valuation where the employer makes a contribution to an employee's deferred compensation plan which is (i) nonforfeitable, (ii) fully vested in the employee, and (iii) secured against the employer's creditors by a trust arrangement".
Since the employee's rights will not be "secured against the employer's creditors", the economic benefit doctrine should not trigger immediate taxation upon the creation of the NQDC plan.
Section 83 does not require immediate taxation but includes in income the value of "property" transferred to an employee or independent contractor in exchange for services rendered, when the property becomes transferable or is no longer subject to a substantial risk of forfeiture, whichever occurs earlier.
[10] Thus, as long as the employer's promise under the plan is "unfunded and unsecured", Section 83 will not apply and will not cause taxation before the benefit is paid.
The benefits under a non-qualified deferred compensation plan are considered to be "unfunded" as long as the employee has no rights in any specific assets of the employer, the deferred amounts are subject to the claims of the employer's general creditors, and the employee has no power to assign his or her rights.
[12] Often, the employee already has income above the wage base ($127,200 in 2017) for purpose of the Old Age, Survivors, Disability Insurance (OASDI) portion of the FICA tax, and won't owe the OASDI portion of the tax.
Department of Labor (DOL) Advisory Opinion 81-11A provides that a deferred compensation plan internally financed with life insurance generally will be treated as unfunded if the following criteria are satisfied: 571 F. Supp.
A plan that covers too large a percentage of the employer's work force will not benefit a "select group.
Small number of participants who don't meet Top Hat definition will not taint the plan.
There does not appear to be an adoption by the DOL of the "highly compensated employee" definition found at IRC § 414(q).
The DOL has, however, indicated that a "top hat" group consists of those individuals who have the ability to affect or substantially influence the design and operation of the deferred compensation plan.