Distributions to employees from nonqualified deferred compensation plans are considered
wages subject to income tax upon distribution. Since nonqualified distributions are subject
to income taxes, these amounts should be included in amounts reported on Form W-2
in Box 1, Wages, Tips, and Other Compensation. Most states follow the federal rules for
reporting distributions from deferred compensation plans, please consult local regulations.
You don't "lose" it like a traditional 401K ... instead all the distributions are treated like wages on a tax return ... there are no "penalties" like other retirement plans but there are restrictions ... the IRS link above mentions those. Talk to the plan administrator for more information if needed.
