NQDC Payout Schedule and State Tax After You Retire (4 USC 114, 409A) 2026

What 4 USC 114 actually protects

The statute was added by Pub. L. 104-95 in January 1996 and amended by Pub. L. 109-264 in 2006; both apply to amounts received after December 31, 1995. Subsection (a) is one sentence: no State may impose an income tax on retirement income of an individual who is not a resident or domiciliary of that State, as that State’s laws determine. “State” includes any political subdivision, so a city or county income tax is covered too (114(b)(3)).

“Retirement income” in 114(b)(1) lists nine kinds of source. Read them in two groups.

Source: 4 U.S.C. 114(b)(1)(A) to (I), Cornell Legal Information Institute, read October 28, 2026.

So “qualified plan” for 114 means the items in (A) through (H): your 401(k), pension and IRA can be paid as a lump sum and still be shielded. A nonqualified plan is “any plan or other arrangement for deferral of compensation other than a plan described in subsection (a)(5)” of section 3121 (3121(v)(2)(C)); that is what the executive’s SERP, deferral plan or supplemental retirement plan almost always is. For those, (I) adds two tests:

• (i) Periodic payments. Income that “is part of a series of substantially equal periodic payments (not less frequently than annually …) made for” the life or life expectancy of the recipient (or the joint lives of the recipient and a designated beneficiary), or “a period of not less than 10 years.” The statute adds that cost-of-living adjustments, or adjustments to limit total disbursements under a predetermined formula, do not break the “substantially equal” test.
• (ii) Excess-benefit plans. Income that “is a payment received after termination of employment” under a plan maintained solely to provide retirement benefits in excess of the limits in sections 401(a)(17), 401(k), 401(m), 402(g), 403(b), 408(k) or 415, or any other Code limit on contributions or benefits. The statute does not require a lump sum to be spread out under this test.

Two consequences that are easy to miss. First, a lump sum is not automatically unprotected: if the plan is purely an excess plan and the payment comes after you leave, it can qualify under (ii). A plan that also pays a bonus deferral or a retention award is a harder case, and we did not find a ruling on a mixed plan. Second, a ten-year installment schedule from an ordinary deferral plan is protected under (i) even though it is not an excess plan. The 401(a)(17) pay limit is $360,000 for 2026 (IRS Notice 2025-67), so “excess” starts there.

What states have said

Neither state below is the final word on your plan; each ruling answers its facts.

Source: New York Department of Taxation and Finance advisory opinions TSB-A-16(4)I and TSB-A-20(8)I; California Franchise Tax Board Legal Ruling 2011-02 (a ruling about insurance agents, not executives), read October 28, 2026. Advisory opinions bind the Department only for the petitioner who asked.

The reason a nonresident can be taxed at all is source rules. California taxes a nonresident on income from California sources, and for services it looks at where they were performed (Legal Ruling 2011-02, citing R&TC 17951). New York taxes a nonresident on the items of federal adjusted gross income “derived from or connected with New York sources” (Tax Law 631(a), quoted in TSB-A-20(8)I). 114 is what overrides that, form by form. Both rulings speak of residents at the time of the payment, so the moment your domicile moves matters; how your old state tests a change of residence is a separate question that we do not cover here. Our guide to changing domicile in retirement covers the Florida side.

The matrix: form of payment, 114, 409A and FICA

This table is ours. It applies the statute and regulations to each form of payout; it is not a ruling on any plan.

Source: our arithmetic and reading of 4 U.S.C. 114(b)(1)(I); 26 U.S.C. 409A(a)(2); Treas. Reg. 1.409A-2(b), 1.409A-3(a), (b), (d), (i); 26 U.S.C. 3121(v)(2); New York and California rulings above.

The practical reading: the form of payment, not the size, decides the old-state exposure of an ordinary NQDC plan. A balance of $2 million paid as ten equal annual payments of $200,000 is protected; the same balance paid as a lump sum is not (unless the plan is an excess-only plan and you have separated). With an assumed 6% rate on the sourced share, our arithmetic puts that at $120,000 on the lump sum and $0 on the ten-year schedule; your state’s rate, the sourced share and federal bracket effects will differ, and spreading also changes the federal tax in each year.

409A: what fixes the schedule

Section 409A (added by the American Jobs Creation Act of 2004; IRS Notice 2005-1 was the first guidance) allows a plan to pay deferred compensation only on one of six events, listed in Treas. Reg. 1.409A-3(a): separation from service, disability, death, a time or fixed schedule specified under the plan, a change in the ownership or effective control of the corporation (or a substantial portion of its assets), and an unforeseeable emergency. Notice 2005-1 itself says its principles were to be folded into later guidance; the final regulations govern, and we cite the Notice only for the penalty and FICA answers below.

The fixed schedule is fixed when you defer

Amounts are payable at a specified time or on a fixed schedule only if the dates are nondiscretionary and objectively determinable when the amount is deferred (1.409A-3(i)(1)(i)). A payout window is allowed if it begins and ends in one taxable year, or lasts no more than 90 days and you cannot choose the tax year (1.409A-3(b)). A payment counts as on time if made on the date or later in the same tax year, or by the 15th day of the third calendar month after the date, provided you cannot direct the year (1.409A-3(d)). So the schedule you elected when you deferred, usually in the year before you earned the pay, controls.

You cannot re-elect your way out at retirement

A change to the time or form of a payment is allowed only if the plan requires that the election not take effect for at least 12 months, and that the payment be deferred at least five years from when it would have been paid (409A(a)(4)(C); 1.409A-2(b)(1)). For a fixed-date payment the election must be made at least 12 months before the scheduled date. For installments treated as a single payment, the five years run from the first scheduled amount (1.409A-2(b)(1)(ii)). An executive who asks in the retirement year to turn a lump sum into a 10-year stream starting at separation is asking for what the rule forbids. The window to act is before: ask your plan administrator now whether you may elect a later start, and whether the election will take effect before you separate.

Six months of waiting for key employees of public companies

For a “specified employee,” the statute allows a distribution on separation only if it cannot be made before “6 months after the date of separation from service” (409A(a)(2)(B)(i)); the exception is the date of death. Treas. Reg. 1.409A-1(i) defines the specified employee as a key employee of a service recipient any stock of which is publicly traded on an established securities market or otherwise. A key employee under 416(i)(1)(A) is an officer paid more than $130,000 as indexed (it is $235,000 for 2026 in Notice 2025-67), a 5% owner, or a 1% owner paid over $150,000; no more than 50 employees are treated as officers (or, if lesser, the greater of 3 or 10% of employees). The reg tests the 12 months ending on the identification date, December 31 by default, and applies the result from the first day of the fourth month after it, April 1 by default (1.409A-1(i)(3), (4)).

How the delay works: payments due in the first six months can be accumulated and paid on the first day of the seventh month after separation, or each payment can be delayed six months; the employer, not you, picks the method (1.409A-3(i)(2)(ii)). Three payments are exempt from the wait: those under a domestic relations order, for conflicts of interest, and for employment taxes (1.409A-3(i)(2)(i), cross-referring to (j)(4)). For a specified employee who separates on March 15, 2027, nothing can be paid before September 15, 2027 (our arithmetic). For your plan the delay is an opportunity as well as a cost: it leaves a gap in which you can complete a move before the first payment.

The 2027 key-employee figure had not been published in the sources we found as of October 28, 2026 (not verified); the list that applies at your separation was built on prior-year pay.

The penalty

If the plan fails or is not operated according to 409A, all vested deferred compensation for the year and earlier years is included in income, with interest at the underpayment rate plus 1 percentage point on the underpayments that would have occurred, and an additional 20% of the compensation included (409A(a)(1)(A), (B); Notice 2005-1, A-2). Paying yourself early to beat a state tax is the failure the section is built to catch.

FICA: the tax you pay before the money

Section 3121(v)(2)(A) taxes an amount deferred under a nonqualified plan “as of the later of” the date the services are performed or the date it is no longer subject to a substantial risk of forfeiture, and (B) says the amount, and its later earnings, are not wages again. Treas. Reg. 31.3121(v)(2)-1(a)(2) is the same rule in regulation form. 409A does not change it (Notice 2005-1, A-37).

For a retirement-eligible executive whose plan vests on retirement, or whose award stays forfeitable only until a retirement age, that means the whole vested balance (or the newly vested slice) is FICA wages in the year it vests, even if it is paid in installments through 2037. The rates are 6.2% on wages up to the Social Security wage base, 1.45% Medicare with no cap (3101(a), (b)(1)), and 0.9% on wages above $200,000 for a single filer or $250,000 on a joint return (3101(b)(2)). The wage base is $184,500 for 2026 and $192,300 for 2027, as reported from the Social Security Administration announcement of October 14, 2026 (we could not read SSA’s own page; not verified at the source).

Example (our arithmetic, assumptions only): an executive whose 2027 pay already exceeds both the wage base and the $200,000 line has $500,000 of NQDC vest on retirement. Medicare at 1.45% is $7,250 and the additional 0.9% is $4,500: $11,750 in employee FICA on money not yet paid. If that executive’s other 2027 wages are low, up to 6.2% of $192,300, or $11,922.60, can also apply. Our Form 8959 guide walks through the additional Medicare tax. A plan may pay out money early to cover the FICA on it without breaking 409A, up to the FICA amount and the income-tax withholding on it (1.409A-3(j)(4)(vi)).

What to do before the retirement date

1. Pull the plan document and your election form. Find the form of payment, the payment event (separation or a fixed date), and when it locked. Check whether the plan says each installment is a separate payment.
2. Classify the plan. Is it an excess plan kept solely for benefits above the Code limits, or a deferral plan funded from bonus and salary above that? Ask the plan administrator to say so in writing.
3. Ask whether you are a specified employee. If your employer’s stock is public, ask when the list was set and whether you are on it.
4. Check any election window. A subsequent election must be made at least 12 months ahead and push the payment out five years; ask whether the plan allows one at all.
5. Fix the move date and residency evidence. The rulings above frame protection by whether the recipient is a nonresident when paid. Complete the move before the first payment, with the state’s own tests in mind.
6. Ask the payroll team what FICA has been withheld on vested balances, and what you will owe in the year of vesting.

FAQ

Sources, read October 28, 2026: 4 U.S.C. 114; 26 U.S.C. 409A, 416(i), 3101 and 3121(v) (Cornell Legal Information Institute); Treas. Reg. 1.409A-1, 1.409A-2, 1.409A-3 (Cornell) and 31.3121(v)(2)-1; IRS Notice 2005-1 (irs.gov/pub/irs-drop/n-05-01.pdf); IRS Notice 2025-67; New York TSB-A-16(4)I and TSB-A-20(8)I; California FTB Legal Ruling 2011-02; Social Security wage bases as reported by the Journal of Accountancy, October 14, 2026. The IRS Employee Plans nonqualified deferred compensation guide and the eCFR copy of 1.409A-3 returned errors when we tried them, so we used the Cornell copies. The state tax example, FICA example and matrix are our arithmetic and reading. This is analysis of public documents, not investment, legal or tax advice; ask a qualified adviser about your own plan and state.