Final Deferred Compensation Regulations Issued

The IRS recently finalized regulations related to the tax treatment of nonqualified deferred compensation arrangements under Section 409A of the federal tax code. As a result, companies must now have their arrangements in writing, and the arrangements must comply with all relevant requirements. The final regulations are effective for tax years beginning on or after January 1, 2008, but may be relied on before that date.

Background

Section 409A was added to the tax law by the American Jobs Creation Act of 2004. The idea behind deferred compensation is to allow executives to defer income to later tax years — and pay income taxes on that income only when they receive it. Section 409A places restrictions on the timing of deferral elections and payments and prohibits accelerated payments.

Operational compliance with Section 409A has been required since 2005.

What Needs To Be Reviewed

These tax rules could affect any kind of executive compensation arrangement that gives an employee, director, or independent contractor performing services for the company a legally binding right to compensation that is or may be payable in a future tax year. Examples include employment and consulting agreements, bonus plans, severance arrangements, buy-out agreements, and stock-based awards, among others.

Act Now

Failure to comply with the Section 409A requirements can lead to immediate income taxation of the deferred compensation, plus the imposition of interest and penalties. To ensure compliance, employers should take appropriate steps now to review and document their nonqualified deferred compensation arrangements.

We can help. Our tax professionals can work with your company to review any arrangement you may have that might fall within the specter of Section 409A. Then, we can show you how your arrangements can be brought into compliance with the new regulations. Why not call today for an appointment with us to discuss your company’s situation.

The information provided in the newsletter has been obtained from sources believed to be reliable but its accuracy is not guaranteed.