Balser News

Statute reaches beyond "typical" Deferred Compensation understand

July 15, 2008

The “new rules” for deferred compensation encompass more than the 401(k)-style deferred compensation plans, so many companies offer to their executive and management employees. Compliance also extends to similar arrangements created for independent contractors, non-employee directors and those “promises” inserted into individual employment contracts with top executives. U.S. Treasury guidance and IRS regulations regarding Section 409A become effective on January 1, 2009.

Before that date, all plans providing for compensation governed by 409A's new statutory and regulatory restrictions (i.,e., nonqualified deferred compensation arrangements) will need to be made compliant, both in form and in operation with the fairly new Section 409A rules. Failure to comply with 409A rules could result in taxable income to employees or other service providers before the compensation is otherwise payable to them, as well as the imposition of a particularly onerous additional 20% income tax penalty and possible interest charges.

Section 409A governs nonqualified deferred compensation sponsored by employers for their employees and independent contractors (including consultants, sales forces and nonemployee outside directors), including traditional deferred compensation plans, excess benefit plans, and SERPs (supplemental executive retirement plans). But 409A also governs many other payments of compensation that are not normally thought of as providing "deferred" compensation, including payments made upon severance from employment (either through severance pay plans, or pursuant to the terms of employment agreements), expense reimbursements, bonus awards and payments upon death or disability. Section 409A also imposes strict rules with respect to certain arrangements providing for stock or other equity compensation. Even where plans and arrangements are designed to meet in operation the Section 409A rules regarding the timing of payments, 409A's strict "form" requirements can require modification of the governing documentation to ensure full compliance

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