Advanced Underwriting Consultants

Question of the Day – March 5

Ask the Experts!

The professionals at Advanced Underwriting Consultants (AUC) answer the tax and technical questions posed by producers.  Here’s the question of the day.

Question: I have a client who participates in a nonqualified deferred compensation plan at his current for-profit employer.  The funds for paying the benefit are inside a Rabbi trust.  The client is entitled to a lump sum payment from the plan in six months.  Is there any option for deferring the client’s income tax result?

Answer: No.

Amounts paid under a nonqualified deferred compensation plan at a for-profit company are not eligible for tax-free rollover to any type of qualified plan—or any other investment.  The amount due under the plan is generally income taxable when paid.

In the past, some employers gave participants the option to choose to take an income stream rather than a lump sum at retirement.  Under the tax rules in effect at the time, the participant arguably didn’t realize an income tax result until the payments were actually received.

Under the Section 409A rules that have been in effect for the last few years, it no longer makes tax sense to draft deferred compensation agreements giving a participant the choice between a lump sum or income stream at retirement.

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