Section 409a Irs

Section 409a prohibited rules that would give participants the advantage of accelerating income while still receiving tax deferred treatment.

Section 409a irs. Section 409a of the internal revenue code is a complex and often counterintuitive set of tax rules applicable to deferred compensation. Notwithstanding section 885 d 1 of the american jobs creation act of 2004 subsection b of section 409a of the internal revenue code of 1986 shall take effect on january 1 2005. The 409a name comes from irs section 409a.

Deferred compensation exists when an employee consultant or board member has a contractual right to compensation that may be paid in later taxable years and includes many arrangements not typically thought of as deferred compensation e g severance benefits. Section 409a of the united states internal revenue code regulates nonqualified deferred compensation paid by a service recipient to a service provider by generally imposing a 20 excise tax when certain design or operational rules contained in the section are violated. Service recipients are generally employers but those who hire independent contractors are also service recipients.

Section 409a applies to all companies offering nonqualified deferred compensation plans to employees. Section 409a defines nqdc as a legally binding right to compensation that is payable and taxable in a later tax year. It created a new section 409a of the internal revenue code 409a and the code respectively.

Thus section 409a can impact not only traditional nqdc plans such as salary deferral plans and supplemental executive retirement plans serps but also arrangements such as executive employment agreements severance. 409a affects nonqualified retirement plans and other deferred compensation arrangements. We are not attorneys so we will leave the legal minutiae of that definition for others to grapple with noting only that generally speaking a deferred compensation plan is an arrangement whereby an employee service provider in 409a parlance receives compensation in a later tax year.

108 357 set out below subsection b of section 409a of the internal revenue code of 1986 shall take effect on january 1 2005. Notwithstanding section 885 d 1 of the american jobs creation act of 2004 pub. Added as part of the american jobs creation act of 2004 it states.

Basically under 409a a nqdc plan is defined broadly as compensation or a legally binding right to compensation that is promised to be paid to participants in a subsequent plan year fogleman says. Until further guidance is issued for purposes of section 409a taxpayers may treat the legally binding right to the payments excludible from seca tax under section 1402 a 10 as arising on the last day of the partner s taxable year before the partner s first taxable year in which such payments are excludible from seca tax under section.