Q how can a non qualified plan be structured to not

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Q: How can a non-qualified plan be structured to not violate the economic benefit rule? A: If the value is not known and subject to the potential control of the participant, then this rule has not been violated. The best way is to have the money remain fully controlled by the sponsor until the termination of the deferred comp plan (often retirement or severance of employment). Q: How can a non-qualified plan be structured to not violate the constructive receipt rule? A: An issue is whether or not participants can use the plan to actively manage their tax bracket on an ad- hoc basis. If elections to defer otherwise salary payments is made before the end of a given year (for the next year's deferral plans), then there is no issue. What about Social Security Taxes? This cartoon makes light of the fact that the social security system in the United States is essentially a system of taking money from those who are working and redistributing it to those who are retired (or in some cases those who are disabled). If you look on your paycheck stub, you will notice a subtraction from your gross pay for FICA. This stands for Federal Insurance Contributions Act (FICA), which is a glorified term for social security taxes (6.2% tax for the employee) and Medicare taxes (1.45% tax for the employee) rolled into one line item on your pay stub. The taxes are based upon earned income. What happens when some of that income is deferred using a non-qualified deferred compensation program? The income is applied to FICA taxes not when it is distributed but at the later of (1) the date services were performed to earn the money, or (2) when there is no longer any substantial risk of forfeiture. Consider Participant “A” who defers 10% of their wages every year into a non-qualified deferred compensation plan. This particular plan is set up such that all funds in the plan are fully vested after Participant A has completed 5 years of service. After 5 years have passed, the entire account balance is included in taxable income for the purpose of calculating FICA (social security) taxes because the substantial risk of forfeiture has been removed. For FICA taxes, it does not matter if the participant has been careful to not violate the economic benefit rule and/or the constructive receipt rule. Social security taxes are a whole different animal.
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For any given year, income earned above a certain threshold does not apply to social security taxes anyway. That income threshold is called the taxable wage base , and it is currently $128,700 (2018 limit). To the extent that normal income plus deferred compensation exceeds this number, it will not be taxed for the social security portion of FICA whether the income is from normal wages or deferred compensation. Medicare taxes are still withheld regardless of salary level. Consider John who earns $85,000. He will have $5,270 (6.2% x $85,000) withheld for Social Security and $1,232.50 (1.45% x $85,000) withheld for Medicare. Now, compare his scenario with Bill who earns $250,000. Social Security taxes will apply to Bill up to the taxable wage base, but Medicare applies for his entire salary. Bill will
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