Deferred Comp and §409A

[BulldogTom]

This is an area I am not very familiar with. Client has an unfunded Deferred Comp plan for 1 key employee. No deductions on books yet. No income to key employee yet. First payment scheduled in 2011. Client is having a good year - yes a very good year. He wants to accelerate the payments on the plan to take the deductions this year. CPA is telling Key Employee there is a 20% penalty for doing this.

Anyone have experience with this situation.

Tom

Lodi, CA

[kcjenkins]

http://www.irs.gov/retirement/article/0,,id=186222,00.html

What is §409A?

§409A was enacted in October 2004 and was generally effective on January 1, 2005. It applies to compensation that workers earn in one year, but that is paid in a future year. This is referred to as nonqualified deferred compensation. This is different from deferred compensation in the form of elective deferrals to qualified plans (such as a 401(k) plan) or to a 403( or 457( plan.

How does coverage under §409A affect an employee’s taxes?

If deferred compensation meets the requirements of §409A, then there is no effect on the employee’s taxes. The compensation is taxed in the same manner as it would be taxed if it were not covered by §409A. If the arrangement does not meet the requirements of §409A, the compensation is subject to certain additional taxes, including a 20% additional income tax. §409A has no effect on FICA (Social Security and Medicare) tax.

What if the criteria in Notice 2008-62 are not met?

On August 7, 2007, the IRS established assistance through Frequently Asked Questions on §409A and Deferred Compensation which provides guidance on how to establish the deferred election within the provisions of §409A.

Resources for IRC §409A:

Notice 2008-62, Interim Guidance on 10 vs. 12-month Pay Period

IR-2007-142, August 7, 2007, New Rule Will Not Affect Teacher Salaries in Upcoming School Year

Frequently Asked Questions on §409A and Deferred Compensation

Notice 2007-86, Delayed Effective Date of §409A Requirements

409A Final Regulations

Presentation Slides on 10 vs. 12-month Pay Period

[BulldogTom]

http://www.legalbitstream.com/scripts/isys...y/irl88f7/1/doc

KC,

I don't know how to insert a hyperlink, but the link above goes to LegalBitStream.com and Notice 2005-1. In Part C, Question 15, it seems to say that once you adopt a non-qualified deferred comp plan, no early payouts are allowed. I am still looking for other guidance, but this seems pretty clear. Unless it was superceeded gy other guidance, I think the CPA is correct.

Are you aware of anything after this notice that might be germain to the situation?

Tom

Lodi, CA

[kcjenkins]

You might check out this one, Tom.

http://tinyurl.com/cab5ts

In Dec 2006, the Treasury Department issued Notice 2006-100. Long awaited final regulations were published on April 17, 2007. The IRS has since issued Notice 2007-86, which provides the final regulations will become effective (and the reasonable good faith compliance standard will expire) on January 1, 2009.

Hope these cites help.