Advanced Accounting Issues for Nonprofits May 14, Nonprofit Accounting for Nonqualified Deferred Compensation

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1 By: Kathy Sampson & Kapri Byrne What are they? What are the pros and cons? What are the design and operational requirements? What are the tax and reporting requirements? What is the accounting treatment? Two types: Qualified IRC 401(a) and subject to ERISA Written Defined benefit or defined contribution Cover all employees meeting prescribed service requirements Funded Nonqualified Two types: Eligible IRC 457(b) Ineligible IRC 457(f) Page 1

2 Pros o Fewer regulations = increased flexibility No minimum participation rules No non-discrimination rules No minimum vesting schedules Fewer distribution rules ERISA requirements not applicable such as fiduciary, reporting, and disclosure Cons o Must be unfunded Assets are subject to creditors until distributed o Rollovers not allowed o Liability on employer s Statement of Financial Position o Requires proper planning for future cash payments Eligible IRC 457(b) Compensation deferred into this type of plan is not taxable until first made available, even if no longer subject to a substantial risk of forfeiture Ineligible IRC 457(f) Compensation deferred into this type of plan is taxable once no longer subject to a substantial risk of forfeiture No limit on amount deferred Page 2

3 Established and maintained by eligible employer Covers only a top-hat group Plan document must be written The plan must be unfunded Use of a Rabbi Trust is allowed though No loans No Roth deferrals Minimum distribution requirements Participant direction of investments Maximum deferral by or on behalf of a participant is 100% of participant s includible compensation or $18,000 for 2015 Exception for last 3 years before normal retirement age No age 50-catch up contributions Contributions may be either employer contributions only, employee salary deferrals only, or a combination Compensation may be deferred for any calendar month only if a deferral agreement has been entered into before the beginning of that month Distributions may not be made to a participant or beneficiary earlier than: Calendar year in which participant reaches age 70 ½; Date the participant separates from service with the employer; or Date the participant incurs an unforeseeable emergency Accident or illness Loss of property due to casualty Other extraordinary and unforeseeable circumstances Cash out of small accounts allowed Qualified Domestic Relations Order (QDRO) distributions allowed Page 3

4 Form 5500 not required Contributions subject to income tax when first made available Plan may allow a participant to elect to defer taxation further by making a special election Example 1 Form W-2 reporting Examples 3 and 4 Form 990 Schedule J (B)(i) greater of Box 1 or Box 5 from Form W-2 (C) any deferred compensation not in (B)(i) (B)(iii) all other payments included in Box 1 or Box 5 of Form W-2 (F) any payment to the extent previously reported as deferred on a prior Form 990 FASB ASC 710 Compensation General Defined contribution Defined benefit Investments reported as they normally would be under GAAP for the type of investment Deferred compensation obligation noncurrent liability Page 4

5 What are they? What are the pros and cons? What are the design and operational requirements? What are the tax and reporting requirements? What is the accounting treatment? Page 5