This is an extremely technical and often dry topic in the area of benefitscompensation. However, there are two key changes that businesses should be well informed. Irs issues final regulations under section 409a tax bulletin. Definition of section 409a regulations for nqdc plans. Until the end of december 31, 2008, plans must be operated with a reasonable good faith interpretation of section 409a and other applicable guidance. Accordingly, the proposed regulations expand the antiabuse provision. An internal revenue code section 409a primer by tony ling and galen mason1 the american jobs creation act of 2004 was signed into law on october 22, 2004.
The proposed regulations clarify or modify certain provisions in previously published final regulations on section 409a the final regulations. Section 409a, which was effective january 1, 2005, has greatly expanded and complicated the tax rules governing nonqualified. A plan does not satisfy the requirements of section 409a and this section and 1. Irs publishes new proposed regulations on section 409a. Gibson dunn irs releases final section 409a regulations on. As such, the proposed amendment offered by state farm is appropriate in light of the requirement that the terms of the state farm agents agreement form aa3 be amended in writing to comply with section 409a by december 31, 2008. As supplemented by regulations and other guidance, section 409a.
The new regulations are effective as of january 1, 2008, but they can be relied upon to meet the good faith compliance standard that continues to apply in the interim. Specifically, the new proposed rules would amend treasury regulations 1. In this issue of benefits law journal, youll find a pithy and instruc tive discussion of irc section 409as separation pay rules by peter. The right to the new payment can be considered an impermissible acceleration of the forfeited deferred compensation. The proposed regulations add details to section 409as basic rules regarding initial deferral elections, antiacceleration and the time and form of payment, including permissible payment events and subsequent changes. Gallagher submitted in partial fulfillment of the requirements of the king scholar program michigan state university college of law under the direction of professor clark c. The final regulations clarify that the exemption from coverage under section 409a for certain welfare plans does not. Section 409a and how it could affect your taxes the motley fool.
A legally binding right a promise oral or written to pay compensation cash, equity, benefits of many kinds to a current, former or future employee, director or consultant. Apr 11, 2007 on april 10, the irs issued longawaited and oftendelayed final regulations regulations interpreting the deferred compensation rules under section 409a of the internal revenue code section 409a. This section was added to the internal revenue service irs code in an effort to decrease the possibility of fraudulent activity as. Irs issues final section 409a regulations on april 10, 2007, the treasury department and the internal revenue service the irs released the final regulations interpreting section 409a of the internal revenue code the code. Final regulations set forth guidance on the application of section 409a to nonqualified deferred compensation plans. Irs clarifies numerous 409a issues groom law group. Proposed section 409a deferred compensation regulations offer.
Over four hundred pages of regulations have been issued under section 409a. Definition of nonqualified deferred compensation plan a. After a number of corporate scandals, congress legislated restrictions for nqdc plans in 2004. On april 10, the irs issued longawaited and oftendelayed final regulations regulations interpreting the deferred compensation rules under section 409a of the internal revenue code section 409a. Rules on deferred compensation, severance pay by wendi s. We are not attorneys, so we will leave the legal minutiae of that definition for others to grapple with, noting only that generally speaking, a deferred compensation plan is an arrangement whereby an employee service provider in 409a parlance receives compensation in a later tax year. On june 21, 2016, the irs issued proposed regulations that modify and clarify various parts of the final section 409a regulations and the proposed incomeinclusion regulations. Under the proposed regulations, unvested deferrals are not included in income until the taxable year in which they vest. Proposed section 409a regulations facilitate common pay practices. The above is just a sampling of some of the new provisions included in the final regulations. A plan that is, or constitutes part of, a nonqualified deferred compensation plan meets the requirements of section 409a a 4 b only if under the terms of the plan, compensation for services performed during a service provider s taxable year the service year may be deferred at the service provider s. Section 409a is intended as a way to regulate deferred compensation arrangements.
On april 10, the irs issued final regulations under section 409a of the internal revenue code regarding the tax treatment of nonqualified deferred compensation. The final regulations adopt the proposed regulations rule that section 409a does not apply to legally binding rights extended to service providers who are using. Falks book is an extremely wellwritten treatise on internal revenue code section 409a. This client alert highlights certain key provisions of the final regulations. It created a new section 409a of the internal revenue code 409a and the code respectively. Irs issues section 409a proposed regulations perkins coie. Brief primer to section 409a in the transaction context introduction section 409a, added to the internal revenue code effective as of january 1, 2005, significantly altered the income tax rules for nonqualified deferred compensation plans. However, special transition rules apply for 2005, 2006, 2007 and 2008. This section was added to the internal revenue service irs code in an effort to decrease the possibility of fraudulent activity as taxpayers move income from one tax year into another. To the extent a deferral exceeds the 402g limit, the final regulations clarify that a portion up to the 402d limit will still be excluded from 409a.
The final word under the new section 409a rules paul hastings. On april 17, 2007 72 fr 19234, the treasury department and the irs issued final regulations under section 409a td 9321, which include 1. On june 21st, 2016, the irs issued proposed regulations that are intended to clarify or modify specific provisions of the 409a regulations, which govern nonqualified deferred compensation plans. While well be spending plenty of time talking about 409a in the abstract, jason and i thought wed give you a real life example of the analysis for one of our portfolio companies.
The internal revenue service irs released proposed regulations on june 21, 2016 under code 409a to clarify or modify certain provisions in the final regulations and to modify currently proposed regulations. If you dont but should know what 409a is, this is the book for you. Yesterday, the irs issued proposed regulations clarifying 19 fairly narrow issues under existing code section 409a regulations. Section 409a applies to all companies offering nonqualified deferred compensation plans to employees. The code section 409a provisions generally apply to compensation deferred under nonqualified plans after december 31, 2004. Overview of deferred compensation arrangements under section 409a andrea i.
The effects of section 409a are farreaching, because of the exceptionally broad definition of deferral of compensation. Background section 409a sets parameters on when service providers, including employees and independent contractors, may be paid nqdc, which is generally compensation earned in one year and paid. Excluded plans the final regulations exclude the types of plans described in section 409a d1 from the definition of a nonqualified. Section 409a on june 21, 2016, the irs issued new proposed regulations under section 409a of the internal revenue code the proposed regulations, which clarify various issues regarding the treatment of nonquali. Further, the fact that a bonus is based on the amount the employer will receive in selling property and that the employer may or may not sell the property, or that the amount the employer will receive upon a. Proposed section 409a deferred compensation regulations. The final regulations along with prior guidance refer to persons or entities potentially subject to section 409a as service providers. Following is the essence of an email i received from one of my colleagues last week about a company of his that went through a formal valuation process for 409a.
Short definition section 409a explains regulations related to nonqualified deferred compensation plans. Section 83b elections for compensatory partnership interests consistent with the principles of section 83, the proposed regulations provide that if a section 83b election is made for an unvested capital or profits interest, the service provider will be treated as a. On june 21, 2016, the irs issued proposed 409a regulations intended to a clarify certain provisions of the final 409a regulations that were published in 2008, b withdraw and replace provisions in those earlier regulations that addressed income inclusion upon a violation of 409a, and c address certain issues pertaining to recurring partyear compensation by revising notice 200862. Section 409a and how it could affect your taxes if youve received any deferred compensation for work you already performed, you need to learn about section 409a of the tax code. These regulations are in regard to the arrangement of deferred compensation. Proposed section 409a regulations facilitate common pay.
The final regulations define certain terms used in section 409a and in the final regulations, set forth the requirements for deferral. Final regulations issued in april 2007 weighed in at. Based on proposed regulations regarding the calculation of tax for section 409a violations, there appears to be a limited opportunity to amend documents with respect to unvested deferrals. The irs issued proposed rules on wednesday that clarify and modify previous regulations regarding sec. The proposed regulations address specific provisions of final regulations issued in 2007 t.
Section 409a of the internal revenue code made dramatic changes to the taxation of deferred compensation plans. Proposed section 409a regulations make several notable. Section 409a imposes a number of requirements that deferred compensation arrangements must satisfy in order to avoid current taxation of participants and a possible 20% additional tax and. The internal revenue service irs has plans to implement new regulations to section 409a of the internal revenue code. The proposed regulations also contain guidance for when plan terminations do not violate the antiacceleration rule. The regulations provide a definition of a nonqualified deferred compensation plan subject to section 409a, including rules related to the statutory effective date, and rules governing initial and subsequent deferral elections, the establishment of the time and form of payment. The rules of section 409a apply to nonqualified deferred compensation plans. The final regulations clarify that the term service provider. Eighteen topics were addressed under the comprehensive final section 409a regulations issued in 2007, and one issue was addressed under the proposed section 409a regulations on the impact of 409a violations issued in 2008. Highlights of final rules for nonqualified defined benefit. The proposed regulations would allow stock units and other equity incentive awards that are intended to be exempt from section 409a as shortterm deferrals i. The proposed regulations add details to section 409a s basic rules regarding initial deferral elections, antiacceleration and the time and form of payment, including permissible payment events and subsequent changes. Section 409a was added to the internal revenue code, effective january 1, 2005, under section 885 of the american jobs creation act of 2004.
Payments upon income inclusion under section 409a these regulations provide that a plan may permit the acceleration of the time or schedule of a payment to a service provider to pay the amount the service provider includes in income as a result of the plan failing to meet the requirements of section 409a. The clause provides for deferred payments of severance to to the extent it can avoid adverse tax consequences to the executive. Transition rules, including a remedial amendment period for plan documents. The regulations affect service providers receiving amounts of. A random walk down the final section 409a regulations. Aug 02, 2016 new proposed regulations under section 409a as well as withdrew certain portions of previously issued proposed regulations under section 409a. Section 83b, section 409a, section 457a and subchapter k. These new proposed regulations are highly technical. Jul 28, 2016 given the draconian consequences of violating section 409a, it is critical that hr professionals, as well as executives, understand basic elements of section 409a and the impact section 409a has on the design of nqdc plans and arrangements. A proposal for reform and a survival kit for the interim by brian t. The new rules under the proposed regulations generally will. Irs notice 200786 provides flexibility for 2008 bonus deferrals but as of january 1, 2009 that flexibility is. Section 409a overview section 409a operates by specifying the nonqualified deferred compensation arrangements that are subject to its rules and by setting out detailed rules that must be satisfied with respect to 1 the timing of elections to defer compensation and. Irs notice 200786 provides flexibility for 2008 bonus deferrals but as of january 1, 2009 that flexibility is gone.
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