OWNERSHIP VS. NQDC
for Key Employees
Although grants are called contributions, no funds are set
aside for most plans, and making a contribution is simply an
accounting entry. The contributions into the plan may be
discretionary (i.e., at the discretion of the board) or based
on the company’s financial performance (i.e., performance-based contributions). As long as there is a “substantial risk
of forfeiture” (see Reg. § 1.409A- 1(d)) associated with the
contributions, the contributions are tax-deferred until the
funds are actually paid to the participants.
payment terms of the NQDC plan, participants may be paid
their deferred contributions with company ownership. Use
caution when assessing the tax treatment of NQDC payments made as ownership.
In such situations, a portion of the NQDC payment is typically made as ownership and a portion is made as grossed
up cash so that the employee may pay the tax liability on the
value of the granted ownership.
There is often a vesting schedule associated with the deferred
contributions, and vesting requirements must be satisfied
before the deferred contributions are paid.
The requirement to satisfy a vesting schedule, along with a
schedule of payments in the future, creates a “golden handcuff” effect (i.e., the requirement that an employee must stay
with the company for a certain period of time to receive some
or all of the deferred contributions).
NQDC payments may be made in cash or company stock
(or LLC ownership). Thus, depending on the vesting and
PAS provides you with the most up-to-date compensation and personnel
information available to contractors.
The broad area of NQDC encompasses many different types
of plans. The following are some types of NQDC plans used
by construction companies:
• Contributory top hat plans – Contributions or synthetic
stock grants are made by the company for the benefit of
the key employee participants
- Equity-based plans
> Phantom stock
> Stock appreciation rights
- Account balance plans
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invaluable for establishing and maintaining competi-
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to Superintendent to Estimator to Carpenter, PAS
offers in-depth compensation data on over 200
positions in the construction industry.
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