What Is DCP on a W2? Non-Qualified Deferred Compensation

When reviewing your W-2, you might see “DCP” in Box 12. This article clarifies what DCP signifies, why it appears, and its general implications for your financial planning.

What Deferred Compensation Means

Deferred compensation broadly refers to income earned in one period but paid out in a later period. This arrangement typically allows an employee to postpone receiving a portion of their current earnings, along with the associated income tax liability, until a future date, often at retirement or separation from service. When “DCP” appears on a W-2, it specifically points to non-qualified deferred compensation (NQDC).

Non-qualified deferred compensation (NQDC) plans differ significantly from qualified retirement plans, such as 401(k)s, because they do not adhere to the strict rules and protections of the Employee Retirement Income Security Act (ERISA). This means NQDC plans do not receive the same favorable tax treatment or ERISA’s protective measures. NQDC arrangements are typically designed for highly compensated employees or executives, offering them a way to defer compensation beyond the contribution limits imposed on qualified plans.

DCP Reporting on Your W2

Amounts related to non-qualified deferred compensation plans are found in Box 12 of your W-2, indicated by “DCP”. Within Box 12, the code ‘Y’ is used to identify deferrals made under a Section 409A non-qualified deferred compensation plan.

The amount listed next to code ‘Y’ in Box 12 represents the compensation you elected to defer, or that was deferred on your behalf, into an NQDC plan during the tax year. This reporting mechanism informs the Internal Revenue Service (IRS) about the deferred amount, even though it is not yet subject to federal income tax.

Tax Treatment of Deferred Compensation

The tax treatment of non-qualified deferred compensation involves specific rules. Generally, the deferred income is not subject to federal income tax until it is actually paid out or distributed to the employee in a future year. This allows for the deferral of income tax liability, potentially to a time when the employee may be in a lower tax bracket, such as during retirement.

Despite the deferral of income tax, amounts deferred under an NQDC plan are typically subject to Social Security and Medicare (FICA) taxes in the year they are deferred or when they vest. FICA taxes are applied earlier based on a special timing rule. Once FICA taxes are paid on the deferred amount, they are generally not subject to FICA taxes again upon distribution, avoiding double taxation.

Types of Non-Qualified Deferred Plans

Several types of plans commonly result in a “DCP” entry on a W-2, primarily serving to provide additional benefits to key employees. Supplemental Executive Retirement Plans (SERPs) are a common example, where employers agree to pay supplemental compensation to executives, often upon retirement. These plans aim to provide a more robust retirement benefit than what is possible through qualified plans alone.

Deferred bonus plans also fall under NQDC, allowing employees to defer a portion of their annual bonus payments to a future date. Phantom stock plans grant employees hypothetical shares that track the value of the company’s actual stock, with payouts typically occurring at a future event, such as a change of control or retirement. Excess benefit plans are another form, designed to provide benefits that exceed the limits imposed on qualified plans by tax laws.