NQDC Interest Determined Under Section 409A(a)(1)(B)(ii)

In the event that an individual earns income from a nonqualified deferred compensation plan (NQDC) that fails the test of 26 USC § 409A, that income will be displayed in Form W-2 Box 12 with Code Z or Form 1099-MISC Box 15b. This income incurs additional tax comprising of two parts: 

1. 20% of the the amount needed for inclusion in the income 
2. Interest computed on the theoretical underpayment that would have happened had the deferred compensation been part of the gross income in the later of 

• The tax year in which it was initially deferred 
• The maiden year in which the deferred compensation is not at a substantial risk of forfeiture. 

Interest is calculated at the underpayment rate of the year the compensation was initially deferred, plus 1%. 

It is to Line 8c of Schedule 2 (in 2018, Schedule 4 Line 62c) that the additional tax entered in this menu is carried to. 

Additional Information:

IRB 2007-19: Final regulations set forth guidance on the application of section 409A to nonqualified deferred compensation plans