Answers Still Elusive on 409A Reporting

November 4, 2005 ( - While employers must begin information reporting on deferred compensation for tax year 2005, the Treasury Department has not yet fully addressed how companies should report this information on W-2s - and time is running out for employers.

BNA has reported that Daniel Hogans, who is in the Treasury Department’s Office of Benefits Tax Counsel, recently addressed the American Bar Association’s annual institute on this and other issues. According to BNA, Hogans said that it was likely that there would be some transitional relief on reporting deferrals subject to Section 409A for informational purposes. Hogans added that employers should continue to implement the 2005 reporting as required by IRS Notice 2005-1, the only guidance issued so far on the topic (see Feds Release NQDC Plan Guidance ). Treasury may postpone the reporting through transitional relief but cannot waive it since the statute itself requires this reporting. Section 409A amended the Internal Revenue Code to require companies to begin reporting on W-2s and 1099MISCs deferred compensation.

All deferrals subject to Section 409A must be reported according to IRS Notice 2005-1. “The Notice does give some relief with respect to plans such as SERPs. If the amount is not ‘reasonably ascertainable’, a term that also shows up in the guidance regarding when social security taxes apply to deferred compensation, that amount is not required to be reported until it can be determined, explains John N. Smith, III, PLANSPONSOR’s Director of Deferred Compensation Plan Services. “Remember, earnings on amounts deferred are also considered deferred compensation under Section 409A, ” cautions Smith.

Remaining Issues

According to the BNA report, Hogans acknowledged that the amount of information that was available for calculating the amounts was virtually non-existent. “I would hope that companies get this relief,” Smith added. “Both the Notice and the Proposed Regulations tell the companies to act in good faith to come in compliance. There are a lot of difficult issues in computing the amount that should be reported.”

“Treasury has been very reasonable so far with the guidance that it has issued under Section 409A,” said Smith. “In view of the guidance issued thus far, companies should continue to make sure that their programming for tax informational reporting will allow them to report the deferred compensation amounts. They should work with their service providers to see what information the service providers will be able to give to them for informational reporting.”

Hogans went on to add that in addition to guidance on reporting issues, the 2006 guidance would likely include calculation of income inclusion amounts, off-shore rabbi trusts and financial health triggers. This guidance should be ready by early 2006, according to the report. He also added that he expected all the guidance issued and to be issued under Section 409A should be in final form by the end of 2006.