Nonqualified Plans - Box 11 (w2)

[JohnH]

First time I've run across this - maybe someone can enlighten me.
The client's Box 11 entry for Nonqualified plans is significantly higher than the entry in Box 1.

I thought the Box 1 entry would always include anything showing in Box 11.
Obviously I'm wrong.
Does anyone have any insight on how that can happen?

[Burke]

Do boxes 3 & 5 have anything in them? All the ones I have ever seen have been the same in Box 1 and Box 11. Nada in 3 & 5.

[JohnH]

That's what's so odd about this one. It doesn't fit any of the schemes I'm accustomed to seeing. In round numbers,here are the amounts:

Box 1: $215,000
Box 3: $106,800 (Box 4 is correct)
Box 5: $491,500 (Box 6 is correct)
Box 11: $260,000
Box 12: $ 16,500 (code D-401k)

[Lion]

Totals

It adds up perfectly.

Current taxable income $215,000
Deferred income (probably a bonus available to be deferred) $260,000
401(k) non-taxed for income purposes but taxed for Medicare $16,500
= $491,500 Medicare wages

They already maxed out SS wages with Box 1
so Boxes 11 and 12 don't change Box 3 and are not in Box 1 but are included in Box 5.

[JohnH]

Yes, the totals add up, but I guess I had the wrong understanding about Box 11. I thought Box 11 income would also show up in Box 1.

However, in this case the Box 11 income is deferred, so it does't show up in Box 1. Guess I'm going to have to refine my defnition of "qualified" and nonqualified". I thought "qualified" meant the income tax could be deferred and 'nonqualified" meant it could not be deferred. In this case, "nonqualified" means the income tax is deferred and only the SocSec/Medicare tax is not deferred.

The other puzzling thing (to me) is that the Box 11 amount shows up on the front of the 1040 to the left of the Line 7 amount, with the note "DFC 260,000". Guess I don't know why it's showing up on the front of the 1040 if it doesn't affect the amount reported on line 7. (usually this type of note indicates an addition to the W-2 Box 1 amounts, such as unused Dependent Care Benefit or unused Housing & Utilities Allowance for a minister)

[Bees Knees]

I thought "qualified" meant the income tax could be deferred and 'nonqualified" meant it could not be deferred. In this case, "nonqualified" means the income tax is deferred and only the SocSec/Medicare tax is not deferred.

Nonqualified plans can defer both income tax and Social Security tax, depending upon the type of plan. If there is a substantial risk that the employee could lose the benefit, both income tax and FICA are deferred until that risk goes away.

The definition of a nonqualified plan is any plan that is not a qualified plan. Since a qualified plan is required to meet strict rules under IRC §401, then breaking any one of those rules means the plan is a nonqualified plan. As such, you have to look at other rules besides those found in Section 401 to determine when benefits are subject to income tax and when they are subject to FICA.


For example: I promise to pay you a $100,000 bonus 10 years from now if you agree to work for me 10 years and not go to my competition. I will put enough money into an account owned by my business each year so that I have $100,000 in 10 years to pay you the bonus. You do not qualify for any of that money if you quit before the 10 years are up, or I fire you for just cause before the 10 years are up. Since you are at risk to lose the money for the first 10 years, both income tax and FICA are deferred on that money until 10 years from now ( My business has to pay tax on earnings during the 10 year period since the account is owned by my business). Since I am only offering you this bonus and no other employees, it is a nonqualified plan because it breaks the anti-discrimination rules that apply to qualified plans.

[JohnH]

Thanks Bees, Lion, & Burke.
I can honestly say I learned something today.
I had printed off several pages of info trying to figure this out over the past couple of days, but you cut right to the point with that last post.

Gonna have to sharpen my terminology and not toss around those terms so casually.

[Burke]

The other puzzling thing (to me) is that the Box 11 amount shows up on the front of the 1040 to the left of the Line 7 amount, with the note "DFC 260,000". Guess I don't know why it's showing up on the front of the 1040 if it doesn't affect the amount reported on line 7. (usually this type of note indicates an addition to the W-2 Box 1 amounts, such as unused Dependent Care Benefit or unused Housing & Utilities Allowance for a minister)

I have found this to be standard with DFC situations. Anytime an amount is input in Box 11, that message & amt will show up to the left of Line 7. For the last couple of years, we have been going around and around with the IRS on these taxpayers due to their paying MWP credit based on that info, when the instructions clearly stated not eligible. Anyway, that's a done deal.

[JohnH]

I think you've all alerted me to a CPE topic I need to seek out this year.