Document Compliance Deadline for Section 409A is December 31, 2008. Action Must Be Taken in Order to Avoid Severe Tax Penalties
NEWS
- Health Care Reform after the Election: New Proposed Regulations Address PPACA’s Essential Health Benefits and Minimum Value Requirements
- DOL Replaces Q&A 30 Regarding Use of Brokerage Windows
- New IRS Guidance on the $2,500 Limit on Salary Reduction Contributions to Health Flexible Spending Accounts
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- Regulations under the Foreign Account Tax Compliance Act Confirm that Pension Trust Assets are not Subject to Form 8938 Disclosure
- New HHS Bulletin Confirms Exemption from the Requirement to Provide Essential Health Benefits for Many Employer-Sponsored Health Plans
- New State and Local Health Plan Requirements May Have ERISA Preemption Implications
- IRS Acquiesces to U.S.Tax Court Holding that Gender Reassignment Surgery is a Tax Deductible Medical Expense
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- DOL Announces Decision to Re-Propose Rule on Definition of a Fiduciary
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- California Will Not Tax Health Coverage for Children Required to be Covered under the Patient Protection and Affordable Care Act
- IRS Notice 2011–28 Provides Interim Guidance on Informational Reporting on Employer-Sponsored Group Health Coverage
- U.S. Department of Labor Sets New Extended Deadline of January 1, 2012, for Required Service Provider Disclosures
- IRS Issues Guidance on the Use of FSA and HRA Debit Cards for Over-the-Counter Drugs
- Delayed Enforcement of PPACA's Nondiscrimination Requirements for Insured Plans
- Amendment to the Grandfathered Health Plan Regulations Allows Plan Sponsors to Switch Insurance Companies Without Losing Grandfathered Status
- Penalty-Free Transition Period for Correcting Section 409A Document Errors Expires on December 31, 2010
- DOL Proposes to Exempt Payments from Pension Trusts From LM–30 Reporting
- California May Tax Health Coverage for Children Required to be Covered under the Affordable Care Act
- DOL Posts New COBRA Model Notices after ARRA Subsidy Expires
- Department of Labor Issues Guidance on the MHPAEA
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- 401(k) Questionnaire Coming to 1,200 Employers
- New E-signature Option for Forms 5500 and 5500-SF
- COBRA Premium Assistance Eligibility Extended through May 31, 2010
- COBRA Premium Assistance Extended and Amended
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- EGTRRA Restatement Deadline for Defined Contribution Prototype and Volume Submitter Plans Fast Approaching
- Children's Health Insurance Program (CHIP) Model Notice
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- Supreme Court Declines to Review Hecker v. Deere
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- NEW IRS GUIDANCE ON WRERA AND WAIVER OF THE 2009 SECTION 401(A)(9) REQUIRED MINIMUM DISTRIBUTIONS
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- Children's Health Insurance Program Reauthorization Act of 2009 — Impact on Group Health Plans
- 2009 Required Minimum Distributions Waived under the Worker, Retiree, and Employer Recovery Act of 2008
- Health Plan Update
- "It's the Relief that Counts": Notice 2007–86 Provides 409A Compliance Extension
- MEDICARE PART D ANNUAL NOTICE REQUIREMENTS
- Special Alert: Massachusetts Health Care Reform
- S.F. Ordinance Requires Paid Sick Leave Benefits to Employees
- IRS Extends Compliance Deadline under Code Section 409A
- Updated Guidance and Notices (Including a New Notice Obligation) for Medicare Part D
- Medicare Part D Annual Notice
to CMS Due Soon - HIPAA Privacy Notice Reminder
- Long-Awaited Guidance on Section 409A Has Arrived
- Update: Discretionary Clauses in Disability Insurance Policies
- Notice Regarding Changes to Certain Written Communications
- Final HIPAA Portability Regulations Became Effective July 1, 2005
- CMS Releases Medicare Part D Creditable Coverage Guidance
- Stock Option Accounting Update
- DOL Publishes USERRA Notice for Posting by Employers
- Automatic Rollover of Mandatory Cash-Outs
- AB 2208 Mandates Insurance Coverage for California Registered Domestic Partners
- Deferred Compensation Update
- New Rules for Those Plans Required to Provide QJSA and QPSA Notices
- The Pension Funding Equity Act of 2004; Internal Revenue Service Notice 2004–34 and Announcement 2004–38
In General Internal Revenue Code section 409A ("Section 409A") provides that amounts deferred by an employee (or other service provider) under a "nonqualified deferred compensation plan" are taken into income when deferred or, if later, when no longer subject to a substantial risk of forfeiture, unless the plan (policy or arrangement) complies with the requirements of Section 409A. Section 409A is effective for all deferrals of compensation after December 31, 2004. Any deferral of income that was earned and vested before January 1, 2005, remains subject to the law that was in effect prior to the enactment of Section 409A, unless provisions applicable to amounts earned and vested before January 1, 2005 are "materially modified" after October 3, 2004.
Extreme Tax Penalties for the Failure to Comply If a nonqualified deferred compensation plan fails to comply with Section 409A (either in form or in operational compliance), the deferred compensation is includable in the employee's income at the time the deferred compensation ceases to be subject to a substantial risk of forfeiture. It is then subject to a 20% federal tax, as well as late payment and interest charges (if applicable), in addition to ordinary federal income taxes. California also imposes its own 20% resident tax, in addition to ordinary state income taxes. Therefore, a California resident who is subject to the highest marginal income tax rate could receive less than 15% of a deferred compensation payment if the arrangement fails to fully comply with Section 409A. In addition, employers can incur a significant tax liability for failing to properly report and withhold on any deferred compensation that fails to comply with Section 409A and is retroactively included in an employee's income.
Broad Scope of Section 409A The term nonqualified deferred compensation plan under Section 409A is extremely broad. A plan generally provides for a deferral of compensation if, under its terms and the relevant facts and circumstances, an employee (or other service provider) has a legally binding right during a taxable year to compensation that, pursuant to its terms, may be payable to the employee (or other service provider) in a later year. To illustrate how far reaching Section 409A is, we have set forth the following examples of provisions under certain agreements that a company may not consider as being subject to Section 409A, but indeed would violate Section 409A, as the employee has been granted a legally binding right during one year to compensation that may be payable in a later year:
Arrangements that Could Be Subject to Section 409A Below is a list of arrangements that could be subject to Section 409A and that must be reviewed and amended prior to December 31, 2008 for compliance with Section 409A. (Please note that this list is not exhaustive, but simply contains examples of arrangements that must be reviewed for compliance with Section 409A):
Actions That Should Be Taken by Employers NOW Employers first should identify all arrangements that may be subject to Section 409A. By December 31, 2008, these arrangements must be in writing and documented (or amended) for compliance with Section 409A. This must be done quickly! Keep in mind that in order to amend these arrangements, consent of affected parties and/or approval of the Board of Directors of the company may be required. This is only a general summary of action that must be taken by December 31, 2008. Please let us know if you would like us to review any arrangements for compliance with Section 409A.
Copyright © Trucker Huss. All rights reserved. This article is published as an information source for our clients and colleagues. The article is current as of the date shown above, is general in nature and is not the substitute for legal advice or opinion in a particular case. In response to new IRS rules of practice, we inform you that any federal tax information contained in this writing cannot be used for the purpose of avoiding tax-related penalties or promoting, marketing or recommending to another party any tax-related matters in this writing.