Coping with the Strict New Rules on Non-Qualified Deferred Compensation
Estate Planning, Vol. 33, p. 31, June 2006
Posted: 2 Jul 2006
The American Jobs Creation Act of 2004 contains a startling new provision that has turned the world of non-qualified deferred compensation planning upside down. The newly-enacted provision, codified in IRC Section 409A, has caused practitioners to rethink their understanding of the rules of constructive receipt.
Compensation not subject to Section 409A generally is taxed under the rules of constructive receipt. An amount is generally considered constructively received during the tax year in which a payment is credited to a worker's account, set aside for him, or otherwise made available to him.
Section 409A shifts the focus on the timing of taxation from an inquiry into constructive receipt toward a study of certain mechanical and design features of a plan. In order to avoid the immediate inclusion of deferred compensation in gross income, a plan must now comply with the (1) distribution, (2) acceleration of benefits, and (3) election tests.
Failure to comply with the Section 409A rules can cause immediate taxation of the amount of deferred compensation, plus interest and penalties. Practitioners must be aware of Section 409A and its application to a variety of compensation schemes. Existing plans should be reviewed for compliance and revised if necessary.
The article first examines the tests that must be met in order to comply with Section 409A. Next reviewed is the impact of Section 409A on some of the more popular non-qualified deferred compensation plans adopted by closely held, for-profit companies for the benefit of cash-basis workers.
Note: This is a description of the paper and not the actual abstract.
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