IRC Section 409A Nonqualified Deferred Compensation (NQDC) Plan Regulations

Posted by Aaron Juckett, CPA, CPC, QPA, QKA on Mon, May 05, 2008
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Now’s the Time to Comply With NQDC Regs discusses IRC Section 409A and the related nonqualified deferred compensation (NQDC) plan regulations (see below for links to the regulations):

  • What NQDC Is and Is Not
    • Distributions
    • Acceleration of benefits
    • Elections

  • What's Covered – "The new rules apply to many common plans, including SERPs (supplemental executive retirement plans); certain SARs (stock appreciation rights); certain stock options; certain bonus and incentive deferral arrangements; certain severance arrangements; executive employment agreements that contain a deferral provision; certain split dollar life insurance; arrangements covering nonemployees such as directors; 457(f) plans; and other arrangements providing for the payment of compensation in the future. Some plans covered may not previously have been regarded as deferred compensation."

  • Plethora of IRS Guidance (see below for details)

  • Decisions for 2008

    • Payment elections - "You can make new elections regarding distributions dates and form during the transition period"
    • Linked payments – "The ability to link a payment election under an NQDC plan to an election under a qualified plan has been extended through 2008."
    • Grandfathering – "Clients also have to decide whether to preserve grandfather treatment for amounts deferred before 2005."

  • More Regulation to Come? - "If I'm planning on making any changes in deferred compensation, I would try to do it earlier in the year rather than later"

If the Plan does not meet certain requirements, then some or all of the income deferred under the plan may become includible in gross income in the year of the failure. An additional 20% excise tax may also be imposed. The most important thing is to determine who is subject to 409A, as "the majority of the corporate agreements involved with professionals have provisions for accelerating or delaying payments, which can all trigger 409A issues."

History of 409A Regulations

Section 885 of the American Jobs Creation Act of 2004 (AJCA) added IRC Section 409A - Inclusion in gross income of deferred compensation under nonqualified deferred compensation plans, which provides that all amounts deferred under a NQDC plan for all taxable years are currently includible in gross income unless certain requirements are satisfied, to the Code:

Section 409A provides new and comprehensive rules governing NQDC arrangements. More specifically, § 409A provides that all amounts deferred under a NQDC plan for all taxable years are currently includible in gross income (to the extent not subject to a substantial risk of forfeiture and not previously included in gross income), unless certain requirements are satisfied. Section 409A is effective with respect to amounts deferred in taxable years beginning after December 31, 2004. It also is effective with respect to amounts deferred in taxable years beginning before January 1, 2005, but only if the plan under which the deferral is made is materially modified after October 3, 2004. In other words, § 409A may implicate exams starting with the 2004 audit cycle. If § 409A requires an amount to be included in gross income, the statute imposes a substantial additional tax. Employers must withhold income tax on any amount includible in gross income under § 409A. Section 409A also provides that deferrals under a NQDC plan must be reported separately on Form W-2 and Form 1099, as applicable.

  • Notice 2007-78 - 2008 Transition Relief and Additional Guidance on the Application of § 409A to Nonqualified Deferred Compensation Plans extended the document compliance deadline for one year and provided additional limited transition relief.

  • IRS Notice 2007-86 - Notice of Additional 2008 Transition Relief under Section 409A extended the effective date of the final regulations through the end of 2008.

  • IRS Notice 2007-100 - Transition Relief and Guidance on Corrections of Certain Failures of a Nonqualified Deferred Compensation Plan to Comply with § 409A(a) in Operation established the Nascent Voluntary Correction Program, which is a limited corrections program for inadvertent operational violations.

  • IRS Notice 2007-89 - Reporting and Wage Withholding Under Internal Revenue Code § 409A is an extension to the 2007 tax years of the 2005 and 2006 tax year guidance provided under IRS Notice 2006-100 - Reporting and Wage Withholding Under Internal Revenue Code § 409A. It "provides guidance to employers and payers on their reporting and wage withholding requirements for calendar year 2007 with respect to amounts includible in gross income under § 409A of the Internal Revenue Code."
  • NQDC Audit Technique Guides

    Corporate Executive Compliance contains links to audit technique guides (ATGs), including one for NQDC Plans, which agents use during the course of corporation and/or executive employee tax examinations.

    Topics: rules and regulations, Information Page

    Aaron Juckett, CPA, CPC, QPA, QKA
    Written by Aaron Juckett, CPA, CPC, QPA, QKA

    Aaron is President and Founder of ESOP Partners and provides implementation, administration, and consulting services to hundreds of companies. He is a member of The ESOP Association (TEA) and the National Center for Employee Ownership (NCEO).

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