IRS issues proposed regulations on nonqualified deferred compensation under Section 409A

Tax Hot Topics | IRS issues proposed regulations on nonqualified deferred compensation under Section 409AThe IRS recently issued proposed regulations under Section 409A that apply to nonqualified deferred compensation. These proposed regulations include certain changes to the final regulations issued in 2007 and address how to calculate amounts includable in income under Section 409A.

Among the proposed changes are the following:
  • Modify the short-term deferral rules to allow a delay in payments to avoid violating federal securities or other laws
  • Clarify that stock options and stock appreciation rights will not be subject to Section 409A merely because the amount payable under the option or appreciation right upon an involuntary termination of employment for cause, or the occurrence of a condition within the employee’s control, is based on a measure that is less than fair market value
  • Clarify that certain separation pay plans that don’t provide for the deferral of compensation may apply to an employee who had no compensation from the employer in the year preceding the year in which separation from service occurs
  • Modify the rules regarding recurring part-year compensation (e.g., teachers’ salaries)
  • Provide a rule that generally applies to determining when a “payment” is made for purposes of Section 409A

These proposed regulations include multiple other modifications and clarifications to the current final Section 409A regulations. They also tighten the opportunity to correct Section 409A failures in taxable years prior to the year in which the compensation becomes vested. A plan that doesn’t comply with Section 409A can be brought into compliance prior to the year in which the benefits vest, subject to an anti-abuse rule. The new proposed regulations would place specific requirements on this type of correction, including that the correction generally be consistent with the corrections allowed and the method provided in IRS corrections guidance (i.e., Notice 2008-113 and Notice 2010-6).

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