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My husband is now eligible for a 409A deferred compensation plan. How are Social Security and Medicare deductions handled? Are they against total current income (before 409A deductions) or against the distributions from the plan?

409(a) plans are non-qualified deferred compensation plans, as opposed to qualified deferred compensation plans, like 401(k)s. However, the rules regarding Social Security/Medicare taxes are the same for both - the compensation, not the distribution, is subject to Social Security/Medicare taxation. So the taxes will be taken out of his paycheck now.

As a word of caution, taking an early distribution from a 409(a) plan can impose significantly more taxes and penalties than taking an early distribution from a 401(k) plan. With a disallowed distribution from a 409(a) plan, all the money in the plan can become immediately taxable, retroactive to the date of contribution. Interest and a 20% penalty are also charged. This compares to a 401(k) plan where only the money withdrawn is subject to taxes, as of the date of withdrawal, and a 10% penalty. So be really, really sure that the money won't need to be touched before it's put into the plan.

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