Tax Article - Requirements of 409a Nonqualified Compensation Plans - Boston Tax Services

Author: Jon Chapman, CPA

Congress passed a rather broad piece of legislation in 2004 otherwise known by its Internal Revenue Code section, 409A. This provision is considerably broad and complex in its application and a failure to comply with its complex provisions could result in penalties including a 20% penalty on certain nonqualified deferred compensation payments. The penalty is imposed on the employee. For example, something as simple as a year-end bonus that is paid after March 15 of the following year could trigger this penalty. In the case of a year-end bonus, the bonus should be expressed in writing with a specific payment date. If the payment is not made by that date but in the same taxable year, the penalty generally would not apply. 

In addition, Employees who wish to defer receipt of compensation to 2009 that was earned in 2008 must make a deferral election by December 31, 2008. On a positive note, the IRS recently issued Notice 2007-86 extending through December 31, 2008, important transition relief including permitted changes to the form of payment election and the time of the payment of previously deferred compensation such that changes may be made until December 31, 2008. For the three basic requirements under 409A, please refer to the full article. We urge you to contact us or your lawyer if you have any deferred compensation plans discussed with the attached article that might be affected by this law.

409A Regulations; Basic Requirements (November / December 2007)

409A Proposed Regulations; Calculating the Penalties (May / June 2009)

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