Nonqualified Deferred Comp In Year-End Planning: Can You Change Deferral Elections To Receive Money In 2012, Or Move Scheduled Future Income Distributions Into 2012?

As tax rates are likely to rise after 2012, at least for the high-income taxpayers who typically participate in nonqualified deferred compensation (NQDC) plans, many people are looking at ways to accelerate income into 2012 to get the lower tax rates available now. (Higher tax rates ahead will make nonqualified plans more popular, but that is a blog topic for another day.) It is crucial to understand that NQDC deferrals already made for 2012 income cannot be shifted into 2012. Instead, keeping tax increases in mind, now is the time to focus on deferring 2013 compensation income, as deferral elections for next year must be made before year-end.

Under the rules of Internal Revenue Code Section 409A, one core NQDC concept is that you must make an irrevocable election to defer the income during the year before the year when you earn it and thus would have otherwise received it. Therefore, you are not allowed to change or cancel deferral elections for the current year's income and instead receive the income in that year. This differs from the rules in a 401(k) or 403(b) plan, where you can modify the amount of income for deferral during the year when you are earning it. In NQDC plans, exceptions are made for participants who have just joined the company and for performance-based compensation.

As for shifting future distributions into 2012, this can occur only in very specific situations and depends on your plan. Unless something triggers an early distribution under a specific provision in a nonqualified deferred compensation plan, it is also impossible to move into the current year a payout elected for a future year. If you want to reschedule a distribution, you need to follow strict rules. These force you to make the change at least 12 months before the originally scheduled distribution date, and to redefer the money to a new date at least five years beyond that original distribution date.

The only exception that is under your control occurs with amounts deferred and vested before 2005 in NQDC plans with haircut provisions. Separate from this, an indirect acceleration would be allowed by the Section 409A rules if your distribution were scheduled for January of the following year and your company on its own moved the distribution forward not more than 30 days, to December of the current year. (For more on this very limited situation, see the related FAQ on myNQDC.com, our website devoted to nonqualified deferred compensation plans.)

For the way tax increases may influence your decision on whether and how much to defer, see the articles The Growing Importance Of Nonqualified Deferred Compensation Amid Rising Tax Rates and Advantages To Deferring Income In An Uncertain Tax Environment, also on myNQDC.com.