What Are 409A Plans?

A 409A plan is a type of retirement savings plan reserved for non-qualified deferred compensation (NQDC). The 409A plan, which is governed by the 澳洲幸运5官方开奖结果体彩网:Internal Revenue Service (IRS) code 409A, allows employ𝓀ees to save compensation not yet received from the employer. Since the compensation isn't transferred to the employee, it isn't part of an employee's earned income and isn't taxable. These plans are commonly used by high-earning individuals and come with looser contribution and payout restrictions.

Understanding 409A Plans

Non-qualified deferred compensation plans are referenced in 澳洲幸运5官方开奖结果体彩网:Internal Revenue Code (IRC) 409A. These plans were created in response to the cap on employee contributions to government-sponsored 澳洲幸运5官方开奖结果体彩网:retirement savings plans. NQDCs allow high-income earners to defer income ownership and avoid income taxes on their🌱 earnings while enjoying tax-deferred investment growth. That's because they can't contribute the same proportional amounts to their tax-deferred retirement savings as other earners,

For example, if Sarah, an executive, earned $750,000 per year, her maximum 401(k) contribution of $23,000 (for tax year 2024) would represent only 3% of her annual earnings. This makes it challenging to save enough in her retirement account to replace her salary in retirement.

By deferring some of her earnings to an NQDC, she could postpone paying 澳洲幸运5官方开奖结果体彩网:income taxes on her earnings, enabling her to save a higher percentage of her income than is🃏 allowable under her 401(k) plan. Savings in an NQDC are often deferred for five or 10 years, or until the employee retires.

NQDCs don’t have the same restrictions as 澳洲幸运5官方开奖结果体彩网:retirement plans; an employee could use their deferred income for other savings goals, like travel or education expenses. Investment vehicles for NQDC contributions vaಞry by employer and may be similar to the 401(k) investm🌠ent options offered by a company.

Limitations of 409A Plans

Plans like the 409A and other NQDCs can be valuable savings vehicles for highly compensated workers who’ve exhausted their other savings options, but they're not risk-free.

One of the main risks is that they’re not protected by the Employee Retirement Income Security Act (ERISA) like 401(k)s and 403(b)s are. If the company holding an employee’s NQDC declared 澳洲幸运5官方开奖结果体彩网:bankruptcy or was sued, the employee’s assets would not be protected from the company’s creditors. Plan participants are treated the same way as the employer's unsecured creditors.

The money from NQDCs cannot be rolled over into an 澳洲幸运5官方开奖结果体彩网:ind🦄ividual retirement account (IRA) or other retirement accounts after they’re paid out. Another consideration is that if tax rates are higher when the employee accesses their NQDC than they were when the employee earned the income, the employee's tax burden could increase.

The Bottom Line

A 409A plan is a type of non-qualified deferred compensation plan that allows high earners to save more for retirement. The compensation saved in these plans isn't immediately taxable because it is earned but not yet received by the employee. These plans benefit high-income earners by letting them save more than they would in a 401(k). Having said that, employees should understand the associated risks—notably, that they aren't protected from employer bankruptcy and they cannot be rolled over into an IRA.