The Internal Revenue Service (IRS) recently updated its Audit Technique Guide (ATG) for Nonqualified Deferred Compensation (NQDC) plans. An NQDC plan is an elective or non-elective plan, agreement, method, or arrangement between an employer and a service provider (an employee or independent contractor) to pay the service provider in the future. NQDC plans do not provide employers and service providers (generally employees) with the tax benefits associated with qualified plans that meet all the requirements of Section 401(a) of the Internal Revenue Code.
While an ATG is published to give guidance to IRS agents in the field, this ATG is very helpful to tax advisors and employers (as are many ATGs). It provides a good roadmap to insure that NQDCs are in compliance with the rules that allow the deferral of income for employees and to appropriately apply the rules for FICA, FUTA and federal withholding on nonqualified deferred compensation.
Recently, I have had discussions with oil and gas exploration and production companies about setting up NQDCs and incentive compensation plans for key employees. This ATG does a good job of covering many issues of the more typical nonqualified deferred compensation plans. Also, the nature of the exploration and production business, unique taxation provisions associated therewith, and the risk-tolerance of many participants in the E&P business combine to provide ample opportunities for developing creative incentive compensation plans.
Start your research of NQDCs with this ATG. Thank you, IRS.