Nonqualified deferred compensation plans (NQDC)

Nonqualified deferred compensation plans (NQDC) are elective plans that allow employees to defer compensation from one tax year to another and entitle them to that compensation. Unlike qualified deferred compensation plans, which are regulated under Section 401(a) of the Internal Revenue Code, NQDC plans are regulated under IRC Section 409A and are commonly referred to as such.

Withholding taxes on deferrals (not supported by Gusto)

FICA and FUTA taxation deferrals are not supported by Gusto.

Nonqualified plans let employees defer federal income taxes until the wages are received by the employee. However, Social Security, Medicare (FICA), and Federal Unemployment Taxes (FUTA) are assessed on wages at the time the contractual services are performed, or when there is no substantial risk of forfeiture.

Withholding taxes on deferrals for nonqualified plan contributions can be difficult because the employer must withhold taxes on wages that the employee has not yet received. The timing and calculation of these taxes are based on an estimated method or lag method.

Set up exemptions and adjust W-2s

Gusto does not support adding deferral amounts of NQDC plans or deductions to payroll, but we can adjust W-2s as needed at the end of the year.

In order to be reported correctly, NQDC plans require plan-specific taxation. Since these plans are highly contractual and taxation is determined based on vesting and risk of forfeiture, make sure to work with your tax professional to determine any taxation adjustments.

Here are steps to consider regarding any tax exemptions and W-2 adjustments: 

  1. If you have specific NQDC questions, work with your tax advisor to confirm how distributions should be taxed. Gusto cannot provide legal or tax advice.
  2. Based on the timing of distributions, certain taxes may be exempt. Set up the necessary exemptions for the employee(s) in Gusto.
    • Examples of taxation for 409A:
      • Withhold for FIT & SIT only
      • Exempt for FICA (taxed when deferred)
      • Exempt for SUI (taxed when deferred)
      • Exempt for SDI and other subaccount taxes (taxed when deferred)
  3. Work with your tax professional to determine W-2 reporting requirements in accordance with 409A guidance (see the NQDC chart on page 33) specific to deferral amounts.
  4. Contact Gusto at the end of the year to adjust Form W-2 for the applicable tax year. Gusto can perform a Manual Wage Adjustment for boxes 1, 3, 5, and 11.