IRS Clarifies 409A NQDC Rules' Impact on Teacher Comp

August 8, 2007 ( - The Internal Revenue Service (IRS) has issued new publications to explain how the 409A nonqualified deferred comepsnation rules may apply to school district employees who are able to elect to spread their school-year compensation over a 12-month pay period and similar arrangements of taxpayers with part-year work periods.

In a news release  and Frequently Asked Questions ( FAQ ) document, the IRS explains that the new regulations will not affect the way teachers’ pay is taxed in the upcoming school year.

According to the FAQ:

  • School districts are not required to offer their employees an election between being paid over the school year and being paid over a 12-month period,
  • School districts that choose to offer such an election need not make any changes prior to 2008 and their employees will not be subject to additional taxes, and
  • Any changes required for 2008 are likely to be minor.

Section 409A was initially enacted in 2004; however, final regulations were not issued until April 2007 (See Final 409A Regs Include Important Modifications, Clarifications ). The regulations address treatment of compensation workers earn in one year that is not paid until a future year – nonqualified deferred compensation. 

The IRS warns that school districts that offer annualization elections may have to make some changes in their procedures, but since the new rules will not be applied to such elections for school years beginning before January 1, 2008, school districts and teachers have time to make the needed changes. The FAQ details requirements for elections.