409A Rules Not Expected Until Fall

March 28, 2006 (PLANSPONSOR.com) - After getting flooded with public comments regarding Section 409A rules on non-qualified deferred compensation plans, federal officials now caution not to expect final regulations until fall 2006.

Stephen Tackney, attorney with the Executive Compensation Branch, Tax Exempt and Government Entities Division of the Internal Revenue Service (IRS), told a recentWashington, DC gathering that the IRS also needs extra time to promulgate final rules because of the complexity of the issues, BNA reported. The proposed regulations were issued September 29, 2005 (See  Rules/Regs: Second Chances ), and are expected to go into effect January 1, 2007 (REG-158080-04) (189 PBD, 9/30/05; 32 BPR 2109, 10/4/05).

After tax officials can complete the final version, the IRS will then develop guidance on how to figure out the most appropriate amounts to report on Form W-2,box 12 Codes Y and Z, according to Tackney.

Section 409A provides, generally, that unless certain requirements are met, amounts deferred under a non-qualified deferred compensation plan are includible in gross income, Tackney said. To be includible, however, the amounts must not be subject to a substantial risk of forfeiture and not be previously included in gross income, he added.

According to the official, there are several arrangements not currently deemed to be includible, such as any tax-qualified plans, short-term deferrals, stock appreciation rights, or certain health reimbursement plans. Other non-qualified deferred arrangements, such as certain types of severance agreements, Section 457(f) plans, certain equity plans, phantom stock plans, and discounted option plans, are currently considered to be includible, he said.

The regulations now being developed include the statutory requirement that payments be made at a fixed date or under a fixed schedule, Tackney said. He added that such payments are also permissible upon the occurrence of specific events, such as employment termination, death, disability, change in ownership or control, or unforeseeable emergency.

Tackney told theWashington gathering that the proposed rules also provide guidance on what it means for a payment to be made when one of these events happens. When the time of payment is based upon the occurrence of one of these events, the plan also must designate an objectively determinable date or year following the event upon which the payment is to be made.

Employers also must make deferral elections in the year prior, Tackney said, adding that there no longer would be event-based payments under the new rules.


The official warned of three main consequences for employers for violating Section 409A:

  • immediate income inclusion, with all the subsequent tax and reporting responsibilities,
  • a 20% penalty, and
  • additional interest penalty that takes into consideration the time value of money.

The wage and information reporting rules will not affect Social Security or unemployment tax withholding or reporting, according to Frederick Wesner, employment tax attorney, Tax Exempt and Government Entities Division, Internal Revenue Service. Employers, however, must report the total amount of deferrals for the year under a non-qualified deferred compensation plan in box 12 of Form W-2, using Code Y, Wesner said.