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Spread The Word –
A Key 409a Deadline Is Fast Approaching
MANY OF YOU work with clients who sponsor
supplemental retirement or deferred compensation plans
for key officers above and beyond their 401(k) plans.
There has been a lot of talk concerning the impact of
the new 409A rules and the deadline for plans to conform
with these requirements. Code section 409A requirements
have been in effect since the beginning of 2005 but the
IRS has repeatedly postponed full written
compliance with the rules. As a result, many clients
have put these matters on the “back burner” expecting
that the deadline will be extended again. This does not
appear to be the case. No extension beyond the
current December 31, 2008 deadline is expected.
Why is this so important?
Any arrangement that fails the new 409A standards will
subject the covered employee/independent contractor to
immediate taxation upon vesting of the
compensation – even though the compensation may not be
payable for several years! In addition, compensation
under a failed arrangement will be subject to a 20%
penalty tax plus possible additional interest charges!
This is in addition to any state or federal income tax
the employee/independent contractor would pay. Moreover,
once the deadline has passed it does not appear that
defective plan documents or deferral arrangements that
have not been properly documented will be “curable.”
This means covered employees/independent contractors
would suffer the consequences noted above.
What Plans are Subject to 409A?
409A applies to any plan that provides for a deferral of
compensation other than under a “qualified plan” (i.e.
401(k), profit sharing or pension plans, SEPs, and
certain other plans), vacation leave, sick leave,
compensatory time, disability pay, or death benefit
plan.
Certain stock-based compensation plans (e.g. stock
option plans and stock appreciation rights plans) are
exempt from 409A provided they do not involve the
issuance of stock or stock equivalents at a discount to
fair market value as of the date of grant. Non-public
entities must examine whether their plans meet the
standards for being excluded from 409A under these
regulations.
Plans subject to 409A include elective deferred
compensation plans and non-elective plans such as
supplemental executive retirement plans (SERPs) as well
as agreements that may provide deferred compensation to
only one individual. 409A also extends to directors,
independent contractors, and partners. Annual bonus or
other annual compensation amounts paid within two and
one-half months of the year in which the services were
performed are excluded from 409A. 409A includes certain
grandfather provisions applicable to benefits vested as
of December 31, 2004, however, the plan must conform to
409A for benefits that vest after 2004,
What Does 409A Require?
Deferred compensation arrangements must be documented
in writing and must i) satisfy precise timing
requirements pertaining to the deferral election, ii)
restrict the payment of benefits to certain permitted
events, iii) contain specific terms governing the form
and timing of the payout of benefits, iv) restrict the
acceleration of the payout of benefits and v) limit the
ability to extend the deferral or alter the timing or
form of payments.
What Can You Do?
When you meet with your clients in the upcoming weeks
remind them that they must have their nonqualified
deferred compensation plans reviewed and amended, if
necessary, to meet the 409A requirements. You might note
that even a simple provision in an employment contract
(e.g. severance pay or deferred bonus) or an
undocumented company practice that involves the deferral
of the payment of compensation to a year later than the
year in which the services were performed may be
considered a “plan” subject to the new law.
Work together with an experienced TPA who can help in
reviewing these arrangements and bringing them into
conformity with the new regulations. Your clients will
appreciate the reminder and the value you are adding to
the relationship!
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