Total Articles: 39
Internal Revenue Code Section 409A: Tax Relief for Non-Compliant Separation Pay Arrangements
Employers and employees routinely enter into arrangements guaranteeing employees separation benefits upon the employee’s termination of employment. Such agreements appear, for example, in employment agreements, severance plans, change of control agreements and separation agreements. Many of these arrangements are not covered by Section 409A of the U.S. Internal Revenue Code of 1986, as amended (“409A”), which governs nonqualified deferred compensation plans. A plan that is covered, however, must meet 409A’s strict rules, or employees under the plan may be immediately taxed on vested benefits under the plan, even if they have not yet been paid the benefits, and may have imposed on them an additional 20% tax on the benefits and premium interest taxes.
Not Too Late to Correct Deferred Compensation (Section 409A) Plan Document Failures, But Deadline Looms.
The Internal Revenue Service has modified procedures for its program for correcting plan documents and agreements that contain provisions that do not comply with the deferred compensation rules imposed by Section 409A of the Internal Revenue Code. New IRS Notice 2010-80 provides an additional method to make the payment of deferred compensation contingent upon an employee’s actions, such as signing a release, compliant with Section 409A.
Valuable Relief for Section 409A Plan Document Errors Will Expire on December 31, 2010
Earlier this year, the IRS issued Notice 2010-6, which provides formal guidance for correction of Internal Revenue Code Section 409A plan document errors and transition relief from adverse tax consequences if such errors are corrected by December 31, 2010. See our prior Cooley Alert. For most plan document corrections that are not implemented until after December 31, 2010, the Notice provides that if payments are triggered within the one year period following the date of correction, 50% of the deferred amount will be subject to adverse Section 409A taxes. However, under the transition relief, any plan document error that is corrected on or before December 31, 2010 will be treated as retroactively corrected effective on January 1, 2009, so that no Section 409A tax consequences will apply with respect to such error, regardless of the timing of subsequent payment triggering events.
New IRS Position Governing Severance Payments Goes Into Effect.
In 2004, Congress enacted Internal Revenue Code (Code) § 409A to provide rules regarding the taxation of deferred compensation. Code § 409A applies to all types of “deferred compensation,” including certain severance pay arrangements. For such agreements to comply with § 409A, the time, form and triggering event for deferred compensation payments must be established at the outset. Once established, subsequent changes in the form, the time of payment, or the payment itself, are heavily restricted. Non-compliant deferred compensation must be included in gross income immediately, even if not yet paid; and that non-compliant compensation is subject to a special tax of at least 20% of the amount of compensation at issue, in addition to normal income taxes. IRS Notice 2010-6 (Notice) establishes a new position which clarifies when a payment of § 409A-covered severance pay is permissible. The Notice also provides a limited correction procedure for existing severance arrangements which are not compliant with the new IRS position.
Relief From Section 409A for Plan Document Errors Requires Prompt Action.
Earlier this year the IRS issued Notice 2010-6, which provides formal guidance for correction of Internal Revenue Code Section 409A plan document errors. Generally, the earlier that the plan document error is corrected under the terms of the Notice, the more likely that adverse Section 409A tax consequences can be mitigated or avoided altogether. In addition, the Notice provides transition relief for certain Section 409A plan document errors that are corrected by December 31, 2010. For many Section 409A plan document errors, the guidance under the Notice effectively extends to December 31, 2010 the original Section 409A documentary compliance deadline of December 31, 2008 mentioned in our prior Cooley Alert. As a result, employers should take steps now to review their compensation arrangements that are subject to Section 409A for compliance with its documentary requirements and take any necessary corrective actions. Adverse tax consequences under Section 409A may include premature taxation, an additional 20% federal income tax (and possibly an additional state tax equivalent, as is the case in California), and an interest-charge tax. As mentioned in our prior Cooley Alert, IRS audits that cover compliance with Section 409A seem a near term certainty.
IRS Establishes Voluntary Correction Program.
Section 409A of the Internal Revenue Code generally provides that nonqualified deferred compensation plans must comply with certain complex rules regarding the timing of deferrals and distributions. Compliance must be in both form and operation. Failure to abide by section 409A's requirements will result in all amounts deferred under the plan for the current year and all previous years becoming immediately taxable to the employee, plus an additional 20% excise tax and interest penalty. As a result, a failure to comply with the requirements of section 409A can have severe adverse tax consequences to the executive.
Document Correction Program for Document Failures in Nonqualified Deferred Compensation Arrangements.
On January 5, 2010, the Internal Revenue Service (IRS) issued Notice 2010-6 providing employers and employees with long-awaited guidance (and relief) with respect to correction of certain document failures that otherwise would subject nonqualified deferred compensation arrangements to the punitive terms of Section 409A of the Internal Revenue Code. Although the IRS previously issued guidance in December 2008 relating to voluntary correction of operational failures, the earlier guidance did not provide relief for document failures. The new Notice provides relief for certain document failures and clarifies earlier guidance dealing with operational failures by nonqualified deferred compensation arrangements and reporting and withholding guidelines under Section 409A.
409A Relief For Nonqualified Deferred Compensation Plan Document Failures.
On January 5, 2010, the Internal Revenue Service (“IRS”) issued Notice 2010-6(“Notice”), which provides a correction method for certain inadvertent and unintentional document failures under Code Section 409A (“Section 409A”) and Income Tax Regulation Section 1.409A-1(c). In some cases, if these failures are corrected, the amount of includible income may be limited and the amount of additional taxes under Code Section 409A may be reduced or eliminated if certain requirements are met. The intent of the correction program is to encourage taxpayers to review nonqualified deferred compensation plans and identify and correct any plan document failures, while at the same time not providing taxpayers who initially complied with less of an advantage than those who did not.
The Latest 409A Release -- A Document Correction Program.
On January 5, 2010, the IRS released Notice 2010-6 (the "Notice"), which prescribes methods for correction of certain documentary failures to comply with §409A of the Internal Revenue Code ("§409A"). Section 409A is the Internal Revenue Code section that prescribes requirements that must be met by most nonqualified deferred compensation arrangements, and further provides that, if the requirements are not met, the deferred compensation will be included in income – and subject to an additional 20% tax – whether or not paid when it is no longer subject to "substantial risk of forfeiture."
Will You Be Ready For Section 409A Compliance Audits?
IRS audits that cover compliance with Section 409A of the Internal Revenue Code seem a near term certainty.[1] As a result, employers should take steps now to ensure that their deferred compensation arrangements are in compliance with the documentary and operational requirements of Section 409A. Adverse tax consequences under Section 409A may include premature taxation, an additional 20% federal income tax (and possibly an additional state tax equivalent, as is the case in California), and an interest-charge tax.
Reporting and Withholding Requirements for Deferred Compensation under Section 409A of the Internal Revenue Code.
As a general matter, employers and others are required to report, on Form W-2 or Form 1099-Misc (whichever is applicable), various amounts attributable to nonqualified deferred compensation arrangements under section 409A of the Internal Revenue Code. For example, compensation that is deferred during a year is reportable, and deferred compensation that is received – or that is otherwise taxable under section 409A – is reportable. In addition, in the case of employees, taxable amounts generally constitute wages subject to withholding.
Legal Alert: Section 409A Update - New Guidance from the IRS.
On December 5, 2008, the Internal Revenue Service (IRS) issued new guidance under Internal Revenue Code (Code) Section 409A. The new guidance consists of: (1) proposed regulations dealing with the calculation of amounts includible in income under, and the additional taxes imposed by, Section 409A(a) when nonqualified deferred compensation fails to comply with Section 409A, and (2) a Notice providing relief for, and methods of correcting, certain operational failures to comply with Section 409A.
Year-End Deadline Looms for Tax Code §409A Compliance.
Problem: In less than two months, on January 1, 2009, your company's executives may become liable for income tax, plus a 20% additional tax, as well as penalties and interest, on income they have earned – even if payment is not due until a later year, or is conditioned on an event, such as a termination without cause that is uncertain to occur. This applies to executives in both public and private companies.
Don't Hand Your Employees a Lump of Coal This Holiday Season!
Many employers are now beginning their compensation planning for 2009. But this year, unlike others, brings a new holiday treat, namely required full compliance with Section 409A of the Internal Revenue Code which places significant limitations and conditions on so-called "deferred compensation" plans and agreements.
Important Deadline for Code Section 409A Compliance (pdf).
Non-qualified deferred compensation arrangements are now subject to a tough new tax
regime under Internal Revenue Code Section 409A. Section 409A became effective on
January 1, 2005, but, because of the complexity of the issues involved in applying the
law, the IRS did not issue final regulations until 2007. As a result, employers have been
given until December 31, 2008, to bring plans and agreements into full documentary
compliance (i.e., to amend written plans and put unwritten plans into writing).
Making Tax Code §409A Corrections Before Time Runs Out.
Problem: In less than six months, your company’s executives may become liable for income tax, plus a 20% additional tax, as well as penalties and interest, on income they have earned, even if payment is not due until a later year, or is conditioned on an event, such as a termination without cause that is uncertain to occur. This applies to both public and private companies. December 31, 2008 is the deadline to bring your company’s non-qualified deferred compensation plans and arrangements, including employment and separation agreements into full compliance with §409A of the Internal Revenue Code.
New IRS Guidance Complicates Both Executive Bonus Plans and Deferred Compensation Arrangements.
In Revenue Ruling 2008-13 (Feb. 21, 2008), the Internal Revenue Service (IRS) added an additional layer of complexity to drafting compensation arrangements for senior executives - an area of the law that already has been subjected to unprecedented changes as the result of Internal Revenue Code (IRC) Section 409A. The ruling adopts a new interpretation of IRC Section 162(m), which Congress enacted in 1993 to limit the amount publicly-traded companies and their affiliates can deduct for compensation paid to their highest-ranking executives. Rev. Rul. 2008-13 expands the scope of Section 162(m) so that an executive's performance-based compensation under a performance plan that satisfies all the criteria of Section 162(m) will be non-deductible solely because the executive also is covered by a severance provision that takes his or her targeted performance bonus into account in calculating severance pay.
Transition Relief for Compliance with § 409A Final Regulation Extended.
Written compliance with the § 409A Final Regulation has been extended by the IRS through December 31, 2008. IRS Notice 2007-86, issued October 22, 2007, supersedes the limited transition relief that was provided in Notice 2007-78 issued in September 2007. Although this extended transitional relief is welcome, employers must still take steps to ensure that all plans subject to § 409A are currently operating in good faith compliance with § 409A.
Benefits Alert - Less Than 100 Days - That's How Long Your Company Has to Comply with Section 409A in Operation.
With open enrollment only weeks away, your new online system is still being tested. It's not going well. The latest merger, the largest yet, is closing at year-end, meaning thousands of new and wary employees must assimilate into your benefit programs. Your daughter wants to be who for Halloween? And isn't it your turn to host your spouse's family (all of them) for Thanksgiving?
IRS Notice Provides Limited Relief for 409A Plans; Does not Change Operational Compliance Deadline of January 1, 2008.
A recent IRS Notice provides limited transition relief and additional guidance for compliance with the requirements of the § 409A Final Regulation, which is effective January 1, 2008.
Treasury and IRS Extend Deadline for 409A Document Compliance.
On Monday, September 10, 2007, the Treasury Department and the IRS issued Notice 2007-78, which provides limited transition relief and additional guidance on the application of Internal Revenue Code Section 409A to nonqualified deferred compensation plans. Notice 2007-78 extends the deadline for plan document compliance under 409A from December 31, 2007, to December 31, 2008. The notice allows a plan to be amended retroactively to January 1, 2008, if the plan contains all of the provisions required by the 409A final regulations and reflects the operation of the plan on or after January 1, 2008.
Are Teachers' Salaries Deferred Compensation?
An issue unique to the private school industry is for the school to pay ten-month teachers over a twelve-month period. This allows both the school and the teacher to budget throughout the year and allows the school to have money from which to make insurance payment deductions during the summer break.
Final Regulations Issued On Nonqualified Deferred Compensation Plans.
On April 10, 2007, the Internal Revenue Service (IRS) and the Department of the Treasury issued final regulations under Internal Revenue Code Section 409A. Section 409A was added to the Code by the American Jobs Creation Act of 2004 and is generally effective for compensation deferred on or after January 1, 2005, under certain nonqualified deferred compensation plans and arrangements ("nonqualified plans").
IRS Releases Final 409A Deferred Compensation Regulations -- Time for Action (pdf).
On April 10, 2007, the IRS issued its final regulations interpreting the nonqualified deferred compensation requirements.
IRS Issues Final Section 409A Regulations Affecting Deferred Compensation Arrangements / December 31, 2007, Deadline For Amending Documents.
In November 2004, November 2005, and October 2006, we sent to you advisories concerning the requirements of Section 409A of the Internal Revenue Code, enacted by Congress as a part of the American Jobs Creation Act of 2004.
Benefits Reminder: Action Needed By Year-End On Deferred Comp Plans.
On April 17, 2007, the Treasury Department released final regulations interpreting the nonqualified deferred compensation requirements of Section 409A of the Internal Revenue Code. Nonqualified deferred compensation that fails to satisfy the requirements of Section 409A is subject to punitive tax treatment and penalties.
New Regs Require Action By Year-End (pdf).
On April 17, 2007, the Treasury Department released final
regulations interpreting the nonqualified deferred compensation
requirements of Section 409A of the Internal Revenue Code.
Nonqualified deferred compensation that fails to satisfy the requirements
of Section 409A is subject to punitive tax treatment and penalties.
IRS Issues Final Section 409A Regulations.
The IRS and Treasury Department have finally issued final regulation on 409A nonqualified deferred compensation plans and arrangements.
Final Regulations Issued Under Section 409A On Nonqualified Deferred Compensation Plans.
The IRS has issued the final regs under Section 409A, effecting deferred compensation.
IRS Extends Date for Amendment of Deferred Compensation Arrangements.
In November 2004, we advised you that the American Jobs Creation Act of 2004 had significantly changed the rules relating to nonqualified deferred compensation and that, with a few exceptions, the new rules would apply to most kinds of arrangements providing for the deferral of taxable income if the deferral occurred after December 31, 2004, or there were material modifications to an existing arrangement. These new rules are generally referred to as the Section 409A rules.
IRS Extends Date for Amendment of Deferred Compensation Arrangements.
In November 2004, we advised you that the American Jobs Creation Act of 2004 had significantly changed the rules relating to nonqualified deferred compensation and that, with a few exceptions, the new rules would apply to most kinds of arrangements providing for the deferral of taxable income if the deferral occurred after December 31, 2004, or there were material modifications to an existing arrangement. These new rules are generally referred to as the Section 409A rules.
IRS Suspends Form W-2 Rptg & Withholding Requirements for Sec 409A Dfrd Comp until Further Notice (pdf).
The Internal Revenue Service (IRS) recently announced in Notice 2005-94 a suspension of the new deferred
compensation reporting and withholding requirements under Internal Revenue Code Section 409A. Future guidance
from the IRS, however, may subsequently require an employer to issue an updated and corrected 2005 Form W-2 (on
a Form W-2c) to account for an employee’s taxable nonqualified deferred compensation under Section 409A.
Individual taxpayers remain responsible for the payment of any tax owed under Section 409A, but the IRS will not assess
penalties if the employee waits for future guidance to determine the taxes owed (interest charges will apply). While
Notice 2005-94 applies to both employer–employee and payer–independent contractor relationships, this Benefits
Briefing focuses only on employer–employee reporting and withholding
IRS Provides Relief For Nonqualified Plan Reporting And Withholding Requirements (pdf).
As requested by the payroll community, the IRS in Notice 2005-94 has suspended
the reporting and withholding requirements recently passed into law under the American
Jobs Creation Act of 2004 (which were scheduled to go into effect beginning with the 2005
calendar year).
Proposed regulation issued on nonqualified Deferred compensation plans (pdf).
On September 29, 2005, the IRS issued an advance copy of proposed regulations
regarding the application of Internal Revenue Code Section 409A to nonqualified
deferred compensation plans and arrangements (“nonqualified plans”). Under Section
409A, which generally is effective for amounts deferred on and after January
1, 2005, all amounts deferred under a nonqualified plan are subject to current income
taxation unless the plan complies with the election, distribution and acceleration
requirements of Section 409A.
Proposed Regulations Issued Interpreting 2004 Deferred Compensation Rules Changes.
As you may be aware, the American Jobs Creation Act of 2004 added Section 409A to the Internal Revenue Code of 1986, effective January 1, 2005. Code Section 409A imposes strict requirements on executive nonqualified deferred compensation plans, and has far-reaching implications for other employment agreements. Failing to comply subjects the executive to income taxes, interest and a 20% penalty on the deferred compensation benefits.
New IRC Section 409A Deferred Compensation Proposed Regulations.
NEW IRC SECTION 409A DEFERRED COMPENSATION PROPOSED REGULATIONS: On September 29th, the IRS issued a 238-page release of proposed regulations under IRC Section 409A (which imposes, among other things, a 20% penalty tax on the individual taxpayer).
It addresses many of the questions raised by IRS Notice 2005-1 (released last December). Of particular importance are the following:
Proposed Regulations Issued On Nonqualified Deferred Compensation Plans (pdf).
On September 29, 2005, the IRS issued an advance copy of proposed regulations regarding the
application of Internal Revenue Code Section 409A to nonqualified deferred compensation plans and arrangements ("nonqualified plans"). Under Section 409A, which generally is effective for amounts deferred on and after January 1, 2005, all amounts deferred under a nonqualified plan are subject to current income taxation unless the plan complies with the election, distribution, and acceleration requirements of Section 409A.
Nonqualified Deferred Compensation Guidance (pdf).
The Treasury Department and the IRS released Notice 2005-1 on December 20, 2004 providing limited guidance on the new nonqualified deferred compensation tax law imposed by Internal Revenue Code Section 409A. While the guidance is not definitive and indicates that the Treasury and the IRS are still thinking through these rules, the notice helps with respect to 2005 deferred compensation planning issues.
Nonqualified Deferred Compensation in a Changing Environment (pdf).
On October 22, 2004, President Bush signed into law a
large corporate tax bill known as the American Jobs
Creation Act of 2004. At a svelte 650 pages (not to
mention the 600-page Conference Report), the new law
changes a myriad of provisions affecting corporate taxes,
with 16 of those pages overhauling the rules applicable to
nonqualified deferred compensation plans.
