This deadline affects employees who are expecting a performance-based bonus for 2009 and who are eligible to participate in their employer’s nonqualified deferred compensation (NQDC) plan.  This is a plan that allows the employee to postpone receipt of some portion of compensation until a later year, and that isn’t a qualified plan such as a pension plan or 401(k) plan.  “Eligibility for these plans is usually limited to highly-paid executives,” says Weiner.

 

The tax code contains strict rules on when employees must decide whether to defer compensation and when the deferred compensation will be paid.  For compensation that isn’t performance-based, this election must generally be made before the start of the year in which the compensation is earned.   For services performed in 2009, the election had to be made by December 31, 2008.

 

But employees get an extra six months to make the deferral election for “performance-based compensation.” This is compensation that is based on the satisfaction of performance standards for a period of at least twelve months that were established in advance.  The election must be made no later than six months before the performance period ends.  Hence, there is a June 30 deadline for bonuses paid on a calendar-year basis.

 

According to Weiner, an employee who makes the deferral election has some flexibility in deciding how to receive the bonus, subject to the terms of the employer’s NQDC plan.  For example, the employee can designate a specific time in a later year or a fixed schedule for payment, as permitted by the plan.  Other permissible distribution events are the employee’s death, disability, or separation from service, a change in ownership or control of the employer, or an unforeseeable emergency.

 

“Once a payment schedule is chosen, it is locked in,” warns Weiner.  “Payments generally can’t be accelerated, and they can be postponed only under limited circumstances—the election to postpone must be made no less than twelve months before the date of the first scheduled payment, and the length of the postponement must be at least five years.”

 

If the employee misses the June 30 deadline or decides not to defer, the future flexibility is greatly reduced.  The employee can still defer the compensation for a short-term period, up to two and one-half months after the end of the year in which the compensation vests.  However, a longer deferral isn’t permitted, because a timely deferral election wasn’t made.  The compensation will be taxable when it’s paid to the employee.

To decide whether or not to make the election, the employee should look at his whole tax and financial picture.  If the money is needed right away, the employee probably shouldn’t defer.  “If the cash isn’t needed, and the employee anticipates being in a lower tax bracket in future years, deferral may be advisable,” advises Weiner.

 

In addition, particularly in today’s economic climate, the employee should consider the employer’s financial condition and credit risk because deferred compensation is subject to creditors’ claims.  The employee should also consider the possibility of recoupment of the bonus if the financial results on which the bonus was based are later found to be inaccurate.