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Nonqualified Deferred Compensation Plans (NQDC)
Section 409A covers most nonqualified deferred compensation arrangements, unless a specific exception applies, and imposes specific timing, election and distribution requirements on covered arrangements that essentially prevent taxpayers from being able to manipulate the timing of tax recognition in their favor. If a nonqualified deferred compensation (NQDC) plan fails to comply with the requirements of section 409A, deferrals are includible in income at vesting and subject to a 20% additional tax. In some circumstances, an underpayment interest penalty will also apply. A nonqualified deferred compensation arrangement subject to Section 409A is defined as any plan, including any agreement or arrangement, “that provides for the deferral of compensation other than a qualified employer plan and any bona fide vacation leave, sick leave, compensatory time, disability pay, or death benefit plan.” A plan providing for deferred compensation is one under which, taking into account the facts and circumstances of the arrangement, the service provider has a legally binding right in one year to compensation that is or may be payable in a later taxable year. Exempted from the definition are short-term deferrals, certain separation pay plans, certain foreign plans, and many welfare benefit plans.