Which statement does NOT correctly describe a concept related to nonqualified deferred compensation?

Which statement does NOT correctly describe a concept related to nonqualified deferred compensation?

• A. An example of substantial risk of forfeiture provisions would be the employee's loss of rights to the plan benefits at death or disability.
• B. The availability of deferred compensation plan funds to the employee, without substantial restriction, generally result in constructive receipt.
• C. Substantial risk of forfeiture exists when the employee's receipt of deferred compensation benefits is contingent upon performance of substantial services in the future.
• D. It generally is not necessary to provide a substantial risk of forfeiture in an unfunded plan.

Answer: (D)

In nonqualified deferred compensation, the timing of tax when the employee is paid depends on whether the right to future pay is actually at risk and not readily available. A substantial risk of forfeiture means the employee could lose the right to receive the benefits if certain conditions aren’t met, typically continuing employment or substantial future service. This risk helps keep the compensation deferral intact, delaying taxes until the specified conditions are satisfied. Constructive receipt comes into play when funds are actually or constructively available to the employee without significant restrictions; if that happens, the income is treated as currently received for tax purposes, defeating the deferral. That’s why the notion that funds in an unfunded plan don’t need a substantial risk of forfeiture is incorrect: without that risk, the employee could access the money and taxes would be due now. The idea that the employee’s future receipt of benefits is contingent on substantial future service is a classic basis for a substantial risk of forfeiture in these plans. And while forfeiture provisions can involve various events, relying on ongoing service to justify deferral is a central concept. So, the statement claiming that a substantial risk of forfeiture isn’t generally necessary in an unfunded plan does not fit how nonqualified deferred compensation is supposed to work.

In nonqualified deferred compensation, the timing of tax when the employee is paid depends on whether the right to future pay is actually at risk and not readily available. A substantial risk of forfeiture means the employee could lose the right to receive the benefits if certain conditions aren’t met, typically continuing employment or substantial future service. This risk helps keep the compensation deferral intact, delaying taxes until the specified conditions are satisfied.

Constructive receipt comes into play when funds are actually or constructively available to the employee without significant restrictions; if that happens, the income is treated as currently received for tax purposes, defeating the deferral. That’s why the notion that funds in an unfunded plan don’t need a substantial risk of forfeiture is incorrect: without that risk, the employee could access the money and taxes would be due now.

The idea that the employee’s future receipt of benefits is contingent on substantial future service is a classic basis for a substantial risk of forfeiture in these plans. And while forfeiture provisions can involve various events, relying on ongoing service to justify deferral is a central concept.

So, the statement claiming that a substantial risk of forfeiture isn’t generally necessary in an unfunded plan does not fit how nonqualified deferred compensation is supposed to work.