Effective for calendar year 2005, the IRS has suspended the rules requiring companies to report amounts deferred or accrued under nonqualified deferred compensation plans on Forms W–2 and 1099–MISC. New rules under Internal Revenue Code sections 6041 and 6051 (which were enacted as part of the American Jobs Creation Act of 2004) require that companies report each year:
- for informational purposes only, the total amount of deferrals (or accruals) and earnings thereon attributable to a participant in a nonqualified deferred compensation plan; and
- the total amount includible in a participant’s income under new Code section 409A that the participant has not actually or constructively received.
The new reporting rules were effective for calendar year 2005 but the IRS has suspended the reporting requirement until further guidance on the valuation and calculation of the reportable amounts is issued. This guidance is expected in the first half of 2006.
Even though the IRS suspended the reporting requirements in Notice 2005–94, the IRS has left open the possibility that companies may be required to issue amended W–2s and 1099s to comply with the new reporting requirements. Therefore, companies should continue to work toward compliance with the new rules. Also, if a plan participant is required to include in income amounts subject to Code section 409A that the participant has not otherwise reported on his or her Form 1040, the participant will likely be required to file an amended income tax return for calendar year 2005.
Important Note: The rules under Code section 3121(v)(2) requiring participants to pay FICA tax on amounts deferred and accrued under nonqualified deferred compensation plans are not affected by this new guidance and the existing rules continue to apply in all respects.
Remember that all affected nonqualified deferred compensation plan documents, including many equity compensation plans, severance plans, change in control plans and employment agreements, must be revised to comply with Code section 409A before December 31, 2006. Please contact us with your questions regarding the application of Code section 409A to your deferred compensation, equity compensation, and other affected arrangements.