Income Tax Rues for Nonqualified Deferred Compensation Plans Flashcards
Constructive Receipt
(1) Funds are available to the employee without restriction, even though they may not actually be received, (2) Must be included in gross income in taxable year funds are made available; (3) Plan can prevent constructive receipt through forfeiture provisions and making funds available to creditors; (4) An unfunded and unsecured promise is not constructive receipt; (5) 409A requires deferral agreement executed prior to beginning of year otherwise deferrals are table and subject to 20% penalty + interest
Availability of Benefits
(1) Constructive Receipt Occurs at the time the employee gains control over the timing of benefit distribution; (2) IRS considers employee to be in constructive receipt of most accelerated benefit option at the time the payment is available to employees. (3) Once distribution is available, employee can no longer defer taxation
Economic Benefit
(1) Something of value that is equivalent to cash; (2) Receipt of economic benefit results in taxation in the year received; (3) A mere promise to pay does not confer economic benefit if the promise is unsecured and unfunded
Substantial Risk of Forfeiture
(1) Relevant in both funded and unfunded plans; (2) The employee’s right to payments is contingent upon future performance of substantial services; (3) a loss of rights due to death or disability is not a substantial risk of forfeiture.
Income Deferral Before Year of Deferral
As long as the funds are unsecured (available to the company’s general creditors), the employee can defer taxation on deferred income
Income Deferral After Year of Deferral
(1) As a general rule, only allowed during 1st 30 days following plan eligibility; (2) When compensation is performance based, deferral based, the deferral election must be made no later than 6-months prior to the end of the 12 month performance period.
Revenue Ruling 60-31
(1) IRS Ruled that constructive receipt will not occur - even if employee has nonforfeitable rights in income if the agreement is executed prior to the earning of the compensation and (2) the employer’s promise to pay is unsecured.
Goldsmith v. US
(1) The court held that a deferred compensation plan that informally funded death and disability payments conferred an economic benefits that must be included in gross income; (2) The IRS has not emphasized this interpretation allowing benefits to be backed by life insurance and annuities without creating a taxable economic benefit.
