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IRS Issues More Proposed Regulations under 409A

Posted on December 9th, 2008 by Chad De Groot | No Comments »
Filed under: Employee Benefits | Print This Post

If you’ve been tuning in to CE lately, you may remember a post a couple weeks ago mentioning the fact that the IRS had yet to publish the income inclusion regulations under 1.409A-4 of the Treasury Regulations that had allegedly been complete for some time. On Friday, December 5th, the proposed regulations were finally published.

Essentially, the proposed regulations, over the span of 90 pages, explain how to determine the amount of deferred compensation that must be included in income if the requirements of Code section 409A are not satisfied. Simply put, this calculation goes as follows: [(1) the total amount deferred] minus [(2) the portion of deferred compensation that is non-vested or has been included in the previous year] = (3) Currently Includible Income. In addition to being subject to income taxes, the includible income is also subject to the Draconian excise tax provided for under the statute of 20%. The IRS has scheduled a public hearing regarding the proposed regulations and requests comments be received by March 9.

Please note, however, that as the proposed regulations provide, “taxpayers may rely on these proposed regulations only to the extent provided in further guidance.” In other words, stay tuned…

A few hours after the proposed regulations were published on Friday, the IRS dropped Notice 2008-113, which succeeds the previous 409A correction guidance provided under Notice 2007-100. This successor Notice sets forth guidelines for an updated 409A corrections program. This program provides methods to be used to correct inadvertant 409A operational failures, and to avoid the full application of the income inclusion rules referenced above. The program does not provide relief for documentation failures, so employers must continue to be diligent in ensuring that all nonqualified deferred compensation arrangements subject to 409A are in writing by the end of 2008, and that those written plans comply with the requirements of 409A.

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