How deferred compensation is taxed. Generally speaking, the tax treatment of deferred compensation is simple: Employees pay taxes on the money when they receive it, not necessarily when they earn it. The year you receive your deferred money, you’ll be taxed on $200,000 in income—10 years’ worth of $20,000 deferrals.
Is Deferred compensation a non qualified pension plan?
Because NQDC plans are not qualified, meaning they aren’t covered under the Employee Retirement Income Security Act (ERISA), they offer a greater amount of flexibility for employers and employees.
What is a supplemental executive retirement plan ( SERP )?
A supplemental executive retirement plan, or SERP, is a non-qualified deferred compensation plan offered by a company to its executives or other highly compensated employees. Learn how the plan functions, its eligibility requirements, and whether you stand to gain from participating in one.
Do you have to pay taxes on SERP contributions?
Employees generally get to defer paying taxes on employer contributions to unfunded SERP plans, and employers get a tax deduction on employee distributions. The plan is best suited for workers who are further along in their careers and will benefit from a SERP as a negotiating chip or a means to make increased retirement contributions.
What makes a SERP a non qualified plan?
A SERP is a non-qualified plan, allowing it to function outside the rules of IRS regulated qualified plans. Unlike qualified plans like a 401 (k) or pension plan, employers don’t have to offer the plan to all employees. SERPs don’t follow IRS tax laws such as penalties for withdrawing from them before age 59 ½.
When do you have to withdraw from a SERP plan?
Since SERPs are non-qualified plans, SERP funds aren’t subject to the 10% tax penalty if you withdraw before age 59.5. There are also no required minimum distributions once you hit 70.5.
