TN 8 (11-93)
RS 01401.090 Non-Qualified Deferred Compensation Plans
A. Policy — general
Beginning 1984, amounts to or from a non-qualified deferred compensation plan are wages for social security purposes when:
services are performed or, if later;
when the employee's right to payment is no longer subject to substantial risk of forfeiture, i.e., when conditions required for the payment are met.
Once a deferred compensation amount is credited as wages in a given period, it is never again counted for social security purposes in any other period.
B. Definition — substantial risk of forfeiture
Substantial risk of forfeiture occurs when an employee's right is conditioned upon the future performance of substantial services for the employer for a period of time.
EXAMPLE: Under Company A's non-qualified deferred compensation plan, certain managerial employees are allowed to defer 20 percent of their salary each year. However, the employee must work for the company for 5 years. There is a substantial risk of forfeiture of the rights to the deferred compensation until the employee provides 5 full years of service. When the substantial risk of forfeiture lapses, the total deferred compensation amount is wages in the year the risk lapses.
C. Policy — substantial risk of forfeiture
Most plans have some kind of forfeiture provision, i.e., that the employee is not entitled to the payment until the employee has worked for the employer for a specified period of time.
1. No risk of forfeiture
If there is no risk of forfeiture provision, payments to the plan are wages for social security purposes when the services are performed and the amount deferred.
2. Risk of forfeiture lapses at retirement
When an employee's right to a payment is conditioned upon working until retirement, all past contributions to the plan (or the value of the plan) including any accumulated interest are wages in the year of retirement. These contributions are added to any other covered wages paid in that year. Any deferred amount in excess of the maximum social security wage base is not wages.
3. Risk of forfeiture lapses before retirement
If the substantial risk of forfeiture lapses before the employee retires, all past contributions to the plan (or the value of the plan) including any accumulated interest is wages in the year that point is reached, up to the maximum social security wage base for that year. If the employee continues working, future employer contributions are wages as they are paid to the plan.
Assume that the employer has correctly treated payments as to whether or not they are wages, unless a question is raised.
If the employer did not withhold social security taxes from the payment, assume the plan is qualified and is not wages.
If the employer withheld social security taxes from the payment, assume the plan is nonqualified and is wages.
1. When to credit
Credit the total deferred compensation amount as wages in the year substantial risk of forfeiture lapsed. The deferred amount is counted only once. There is no further crediting of such wages.
Add the deferred compensation amount to any other covered wages paid in that year subject to the maximum wage base limitation for that year. If wages during any year exceed the maximum wage base limitation, none of the deferred compensation is included as social security wages.
2. When to develop
Develop only if there is information in the file which indicates the employer's treatment of the payment may be incorrect, or the claimant raises a question as to the status of the payment and the PIA is affected by $1.00 or more, or deductions are involved.
3. How to develop
If development is necessary:
Ask the employer if IRS has issued a ruling regarding the plan;
If yes, ask under what Internal Revenue Code section the plan is qualified and document the file to that effect;
If no, and social security taxes were not withheld, obtain a copy of the plan and make a determination as to whether payments were actually or constructively paid or if an economic benefit was received by the employee (RS 01401.030).
4. When to submit case for review
If the status of the plan cannot be resolved with this information, submit the case for review through the appropriate reviewing office to: OISP/OEEMP
6401 Security Blvd.
2514 RMB Bldg.
Baltimore, MD 21235
Include the following in the folder:
copy of the plan and the eligibility requirements;
date the plan became effective for employee;
when services were performed which resulted in the payment;
date substantial risk of forfeiture lapsed (RS 01401.090B.); and
how the employer reported the amounts for social security purposes and basis for such reporting.