Short-Term Deferral Day is Right Around the Corner

Section 409A, the provision of the Internal Revenue Code that regulates the time and form of payment of nonqualified deferred compensation, contains a helpful exception for “short-term deferrals.”  Specifically, Section 409A provides that a payment will not be considered nonqualified deferred compensation if the employer makes the payment on or prior to the 15th day of the third month following the end of the employee’s (or, if later, the employer’s) taxable year in which the employee’s right to the payment vests.  For individuals and for employers with calendar fiscal years, the key date for purposes of the short-term deferral exception is March 15th (a little less than two weeks from today). Read More ›

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Reminder that Nonqualified Deferred Compensation Deferral Elections for 2018 Must be Made on or Before December 31, 2017

As we approach the end of 2017, we want to remind employers and employees to take action before year end if they desire to defer compensation that will be earned during 2018.  As a general rule, Section 409A of the Internal Revenue Code requires that compensation deferrals under a nonqualified deferred compensation plan be made before the year in which the underlying services are performed. There are some exceptions to this general rule, but Section 409A imposes strict requirements on the timing of compensation deferral elections and that most deferrals of compensation that will be earned in 2018 must be made on or before December 31, 2017. Read More ›

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IRS Audit Techniques Guide Provides Helpful Reminders for Sponsors of NQDC Arrangements

Last summer the Internal Revenue Service updated its Audit Techniques Guide (“ATG”) for nonqualified deferred compensation arrangements.  While the ATG provides little instruction on how the IRS will review nonqualified deferred compensation arrangements for compliance with Section 409A of the Code, it provides a helpful reminder of some of the other rules applicable to nonqualified deferred compensation arrangements. Among other things, the ATG reminds sponsors of nonqualified deferred compensation plans to be attentive to the following issues:

  • Deferred compensation arrangements must be in writing.
  • Immediate taxation to a participant could arise if the deferred compensation is not subject to substantial limitations or restrictions (e.g., immediate taxation will arise if the participant can draw on the deferred compensation at any time or if the participant can borrow against the deferred compensation).
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Chief Counsel Memorandum Clarifies IRS Position on Informal 409A Corrections

On May 1, the IRS released a Chief Counsel Memorandum that clarifies the IRS’ position with respect to the correction of deferred compensation arrangements outside of the IRS’ formal Section 409A correction programs.

In the Memorandum the IRS analyzed a retention bonus that was granted in year 1, vested in year 3, and to the extent vested, would be paid in equal installments in years 4 and 5. The retention agreement contained a provision that gave the employer the discretion to accelerate and pay the retention bonus in a single lump sum payment in year 4.  As noted by the IRS, the employer’s discretion to accelerate and pay the retention bonus early violated Section 409A’s prohibition against acceleration.  Read More ›

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