Employers and benefit professionals who had been eagerly awaiting the IRS’s recently released final regulations for its Code Section 409A, the section of the tax code that deals with non-qualified deferred compensation, now know one thing for certain: If they want to comply with the law, they have their work cut out for them.
The regulations, released on April 10, define in great detail the 2004 law on the treatment of non-qualified deferred compensation plans, and in essence, call for these plans to be in full operational and documentary compliance with Code Section 409A. It is not just traditional deferred compensation arrangements that need to be reported: Employers also need to identify any and every employment agreement that they might have with employees and former employees, including, among others, consulting agreements, severance agreements, and equity compensation plans. All these need to be in documentary and operational compliance with Code Section 409A; if employers don’t comply, employees– not the employer–will face immediate taxation on the full
amount of deferral plus a 20% penalty.
With the fire thus lit under them, employers are rushing to get things in order before the December 31 deadline. But professionals like Lynn Dudley, VP of retirement policy at the Washington, DC-based American Benefits Council (ABC), do not think that there will be any major problem of non-compliance, since even without specification, most companies have already been doing what’s needed to comply in the non-qualified deferred compensation area.
“Employers have been complying in good faith all along; now, they just need to make sure that all documentation complies, too, and this is going to mean a lot of work for a lot of people,” Dudley says.
In essence, the goal of both the 2004 law and the final regulations that were recently released are noble. They seek to redress any potential abuses in the non-qualified plan area, Dudley says, so as to ultimately protect workers. Since failure to comply with regulation will mean that employees will have to suffer the consequences by immediate taxation, companies need to be all the more vigilant, and this is a good thing, she says.
Both the IRS and Congress are trying to bring about a cohesive, homogenous regulatory environment for all areas of employee benefits, including the non-qualified deferred compensation arena, agrees Bruce Ashton, a partner in the Los Angeles-based law firm Reish Luftman Reicher & Cohen. The final regulations to Code 409A are significant in that they exemplify the kind of coherence that is necessary in the employee benefits world today, he says.
“We have pretty detailed laws for both the 401(k) and 403(b) areas, so it is time for something similar to be done for non-qualified compensation plans as well, to make them look more like qualified plans,” Ashton says.