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A nonqualified deferred compensation plan is a plan or arrangement established and maintained by an employer for one or more of its employees that provides for the deferral of compensation, but does not meet the requirements for a tax-qualified deferred compensation plan.
Nonqualified deferred compensation for employees is generally subject to social security and Medicare taxes when the related services are performed.
If there is no risk of forfeiture, report wage amounts deferred to a nonqualified deferred compensation plan in box 3 (up to the wage base maximum) and/or box 5 of Form W-2.
If the substantial risk of forfeiture lapses before the employee retires, report all past contributions to the plan (or the value of the plan), including accumulated earned interest, in box 3 (up to the wage base maximum) and/or box 5 of Form W-2. The accumulated deferrals are reported along with any other social security and Medicare wages earned during the year.
Report in box 11 of Form W-2 the amount of deferrals, including any accumulated interest, that became taxable for social security and Medicare taxes during the year (but were for prior year services) because the deferred amounts were no longer subject to a substantial risk of forfeiture. If the employee continues working, future deferrals are social security and Medicare wages when they are earned.
It is not necessary to show amounts deferred during the year under an NQDC plan subject to section 409A. If you report section 409A deferrals, show the amount in box 12 using code Y. For more information, see Notice 2008-115, 2008-52 I.R.B. 1367, available at www.irs.gov/irb/2008-52_IRB/ar10.html.
Income included under section 409A from an NQDC plan will be reported in box 1 and in box 12 using code Z. This income is also subject to an additional tax of 20% that is reported on Form 1040. For more information on amounts includible in gross income and reporting requirements, see proposed Regulations section 1.409A-4, 2008-51 I.R.B 1325, and Notice 2008-115. For information on correcting failures to comply with section 409A and related reporting, see Notice 2008-113, 2008-51 I.R.B. 1305, available at www.irs.gov/irb/2008-51_IRB/ar12.html; Notice 2010-6, 2010-3 I.R.B 275, available at www.irs.gov/irb/2010-3_IRB/ar08.html; and Notice 2010-80, 2010-51 I.R.B. 853, available at www.irs.gov/irb/2010-51_IRB/ar08.html.