Close
Close

IRS provides guidance on Section 409A treatment for pre-2009 Section 457A deferrals

RFP
Tax Hot TopicsThe IRS recently issued Notice 2017-75 to provide guidance regarding nonqualified deferred compensation plan distributions that are accelerated to pay income taxes on amounts includible in income in 2017 under Sections 457A 801(d)(2) of the Tax Extenders and Alternative Minimum Tax Relief Act (TEAMTRA) of 2008.

In 2008, the TEAMTRA added Section 457A, which provides that any deferred compensation from a nonqualified deferred compensation plan of a nonqualified entity is includible in the gross income of the employee (or other service provider) when the compensation vests. A nonqualified entity includes a foreign corporation unless substantially all of its income is either effectively connected to the United States or subject to a comprehensive foreign income tax. Nonqualified entities also include certain partnerships with foreign ownership or ownership by a tax-exempt organization.  

Section 457A generally applies to nonqualified deferred compensation attributable to services performed after Dec. 31, 2008. Nonqualified deferred compensation that escapes Section 457A treatment solely because the amounts are attributable to services performed before Jan. 1, 2009, is subject to Section 801(d)(2) of TEAMTRA, which states that the deferred amounts must be included in gross income in the last tax year beginning before 2018 or the tax year of vesting, whichever occurs later. As a result, many participants in plans subject to Section 801(d)(2) of TEAMTRA will include their deferred compensation in 2017 gross income, resulting in an income tax withholding obligation for the employer. Plan participants may need cash to meet the withholding obligation, so Notice 2017-75 addresses this need.  

In addition to Section 801(d)(2) of TEAMTRA, these plans are generally subject to Section 409A. Section 409A generally prohibits the acceleration of distributions under a nonqualified deferred compensation plan, with certain exceptions. This means a participant in a plan subject to Section 801(d)(2) of TEAMTRA cannot receive an early distribution from the plan in order to pay withholding taxes without violating Section 409A.  

Notice 2017-75 allows the acceleration of nonqualified deferred compensation plan distributions to meet federal, state, local and foreign income tax withholding requirements on amounts includible in income under Section 801(d)(2) of TEAMTRA, without violating Section 409A. Furthermore, a change to a plan to allow this type of accelerated payment will not be treated as a material modification for purposes of the Section 409A grandfathering rules.

The relief from Section 409A penalties is provided only to the extent the accelerated distribution does not exceed the amount of federal, state, local and foreign income tax that would have been withheld by an employer if there had been a payment of wages equal to the amount includible in gross income pursuant to Section 801(d)(2) of TEAMTRA.

Contact
Eddie Adkins
Partner, Washington National Tax Office
T +1 202 521 1565

Jeffrey Martin
Partner, Washington National Tax Office
T +1 202 521 1526

Tax professional standards statement
This content supports Grant Thornton LLP’s marketing of professional services and is not written tax advice directed at the particular facts and circumstances of any person. If you are interested in the topics presented herein, we encourage you to contact us or an independent tax professional to discuss their potential application to your particular situation. Nothing herein shall be construed as imposing a limitation on any person from disclosing the tax treatment or tax structure of any matter addressed herein. To the extent this content may be considered to contain written tax advice, any written advice contained in, forwarded with or attached to this content is not intended by Grant Thornton LLP to be used, and cannot be used, by any person for the purpose of avoiding penalties that may be imposed under the Internal Revenue Code.

The information contained herein is general in nature and is based on authorities that are subject to change. It is not, and should not be construed as, accounting, legal or tax advice provided by Grant Thornton LLP to the reader. This material may not be applicable to, or suitable for, the reader’s specific circumstances or needs and may require consideration of tax and nontax factors not described herein. Contact Grant Thornton LLP or other tax professionals prior to taking any action based upon this information. Changes in tax laws or other factors could affect, on a prospective or retroactive basis, the information contained herein; Grant Thornton LLP assumes no obligation to inform the reader of any such changes. All references to “Section,” “Sec.,” or “§” refer to the Internal Revenue Code of 1986, as amended.