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, nonqualified deferred compensation plans are regulated under IRC Section 409A and are commonly referred to as such. 

Gusto does not support adding 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 that need to be made.

Here’s what you need to do

  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 how your distributions are taxed, 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. This information is not reported on a W-2 according to section 409A guidance, so there is no action required at the end of the year.