7708 / When a precious metal that is held within a nonqualified deferred compensation plan is sold, how is the transaction taxed?

A nonqualified plan could permit plan participants to invest in precious metals on a pre-tax basis, but only with a book-keeping account; that is, hypothetical account. However, even if trading in certificates for the precious metals, the sponsoring company must own the assets held in connection with the plan to achieve IRS income tax deferral and ERISA exemption objectives for a nonqualified deferred compensation plan to achieve income tax deferral. Therefore, the sponsoring business entity would actually possess ownership of the metal, even if held in a Rabbi Trust, if it were to desire to mirror the participant’s investment (which would likely be an objective but without mandating it in the plan creating ERISA plan asset and income taxation issues).

As noted, in a nonqualified deferred compensation plan, the precious metal account can only be a record-keeping, notional account, even if the sponsoring company actually invests in those precious metals directly. Trading on the account (any account) is taxable (to the degree taxable) to the sponsoring company; not the individual participant, unless it is a pass-through tax entity (in which case the taxpayer stands in place of the entity based upon his or her pro rata ownership). However, the participant never has, nor can have, any beneficial interest in the underlying assets if it is to achieve the desired income tax deferral. Hence, unlike a participant’s interest in a qualified plan, an interest in a nonqualified plan must be only an unfunded, unsecured promise to pay, and is subject and must remain subject to loss in the case of the bankruptcy or insolvency of the plan sponsor.

The value of a participant’s notional account at the time of distribution should be taxable as ordinary income to the participant, and not as a capital gain, even if distributed in-kind in satisfaction (by distribution of the asset) of the employer’s debt to the participant based on the plan. Under Section 409A, covered plans may also not accelerate distribution of benefits, except in a few narrow situations. For all these reasons, nonqualified plans are not an attractive vehicle for the purchase of precious metals.¹

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Planning Point: Satisfying a nonqualified deferred compensation account liability owed a participant by the distribution of actual precious metal rather than cash has ordinary income tax consequences, regardless. It also raises potential ERSIA and other income tax issues. Therefore, use of a nonqualified deferred compensation plan to acquire precious metals is not an attractive method for purchasing such metals.

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