409A and You - The Rules Are Changing, So Beware of Costly Non-compliance Penalties
July 1, 2008
Dennis G. Egan, Jr., Esq.
As spring draws to a close, and attentions turn towards picnics, barbeques and ballgames, the clock continues to tick - it continues to tick toward December 31, 2008. While many people associate New Year's Eve with parties and revelry, 2009 will not be a happy year for employees and employers alike if the non-qualified deferred compensation arrangements and/or plans to which they are a party do not comply with section 409A of the Internal Revenue Code. All businesses; big and small, public and private, non-profit and for profit, as well as the workers they employ, may be affected by the requirements of and penalties imposed by 409A.
Section 409A was added to the Internal Revenue code as a result of the enactment of the American Jobs Creation Act of 2004. The impact of this addition is far-reaching and not yet fully appreciated. In fact, if you or your employees participate in a deferred compensation agreement or are a party to an employment or severance agreement that provides for deferred payments, you may be subject to the consequences of non-compliance.
What, you may ask, are the consequences of non-compliance? The penalties are as straightforward as they are harsh. If a plan, arrangement or agreement does not meet the exacting standards of 409A, the amount deferred will be included in the employee's income immediately, even if the employee is not currently eligible to receive that amount. In addition, a penalty tax of 20% will be levied on the amount included in the employee's income. Finally, an interest payment equal to the IRS underpayment rate, plus 1% will be applied from the date when the amount was first deferred to the date when it is includable as income to the employee. Taken together with the income taxes you currently pay, these penalties and interest may equal up to a 50% tax on your income.
Perhaps the best way to explain the application of 409A is to discuss the plans it does not apply to. 409A does not apply to qualified retirement plans, such as plans promulgated under Internal Revenue Code sections 401(k), 457(b), and 403(b), nor does it apply to defined benefit pension plans, employee stock option plans, vacation pay, sick pay, death and disability plans, or compensatory time off, and other similar plans. While this may seem like an exhaustive list of retirement plans and benefits, it does not include supplemental employee retirement plans, employment agreements, severance agreements, some split dollar arrangements, stock option plans and other similar plans.
To further complicate matters, non-qualified deferred compensation that was vested prior to 2005 is not subject to 409A because...
You may read more at the link below.
vBusinessWest
June 23, 2008
Download the full PDF version:
Life Stages
Areas of Practice
