Buzz Archive:
Section 409A of the Internal Revenue Code - Part 3 of 3

by Millicent Lundburg, Principal, Fish & Richardson P.C., 2/12/2008

The American Jobs Creation Act added Section 409A to the Internal Revenue Code, fundamentally changing the tax rules governing nonqualified deferred compensation. Section 409A creates broad rules governing the timing of deferral elections, permissible distribution events, and the timing of tax inclusion for nonqualified deferred compensation. Generally, deferred compensation exists where a service provider has a legally binding right to compensation during a taxable year that becomes payable in a later year. (Hint: Any company with an option plan--pay attention, very close attention!)

Pursuant to Section 409A, amounts deferred under a nonqualified deferred compensation plan are includable in current gross income to the extent not subject to substantial risk of forfeiture and not previously included as gross income, unless the deferred compensation plan satisfies requirements set forth in Section 409A of the timing of deferral elections, permissible distribution events, and prohibiting acceleration of benefits.

On April 10, 2007, the Treasury Department and the Internal Revenue Service (IRS) issued the much-anticipated final regulations under Internal Revenue Code Section 409A (Section 409A), which went into effect January 1, 2008. In the final part of a Three Part series on the importance of 409A, Millicent Lundberg, Principal in the Austin, TX office of Fish & Richardson P.C. and noted expert in employee compensation outlines the specific requirements (and pitfalls) for compliance.