Tax Alert: Deferred Compensation Plans Receive One More Chance
2/15/2010
Under the American Jobs Creation Act of 2004, all nonqualified deferred compensation plans must meet the requirements of Code Section 409A in both form and operation, generally as of December 31, 2005. This date was later extended to December 31, 2008. On December 3, 2008, the Internal Revenue Service (IRS) published Notice 2008-113, providing relief for “operational failures,” as long as certain conditions were met.
On January 18, 2010, the IRS issued Notice 2010-6, providing guidance for plans that don’t comply with the requirements as to “form” (also known as “document failures”). For example, under Section 409A, plans are now allowed to have only specific “payment events,” including death, disability, separation from service, a change in control, or an unforeseen emergency. If a plan allows any other event, or doesn’t define these correctly, a “document failure” has occurred.
Under Section 409A, this failure would require the employee to immediately include the full amount of deferred compensation in income, subject to severe penalties.
Under the new guidance, plans that fail to meet these requirements, but are corrected by December 31, 2010, may be eligible for relief, and the employee will not have taxable income or penalties. This relief program is generally not available to taxpayers currently under audit or those plans with intentional errors.
This means that taxpayers have one more chance to review their deferred compensation arrangements in order to ensure that they comply with Section 409A in both form and operation. Since the deadline to comply with these “document failures” isn’t until December 31, 2010, there is plenty of time to address this. Now, however, is the best time to identify plans that may not be in compliance; they can be fixed after April 15.
In related news, the IRS recently announced that it will begin its first Employment Tax National Research Project in 25 years. Under this project, they will randomly select and carefully examine the employment tax returns of 2,000 taxpayers a year for the next three years; it can be assumed that Section 409A requirements will be considered.
For more information on this and other tax issues, including assistance in reviewing plans for compliance, please contact John L. Evanich, Jr., CPA, partner, or your J.H. Cohn engagement partner at 877-704-3500.
John L. Evanich, Jr., CPA, is a J.H. Cohn tax partner. He can be reached via email or at 860-368-5221.
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