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DISCLAIMER: This blog is published for general information only - it is not intended to constitute legal advice and cannot be relied upon by any person as legal advice.  U.S. Treasury Regulations require us to notify you that any tax-related material in this blog (including links and attachments) is not intended or written to be used, and cannot be used, for the purpose of avoiding tax penalties, and may not be referred to in any marketing or promotional materials.  While we welcome you to contact our authors, the submission of a comment or question does not create an attorney-client relationship between the Firm and you. 

Entries in Code Section 409A (5)


Handling Missing Participants under Code Section 409A

Deferred compensation payments are due to one of your former executives, but the former executive is nowhere to be found. You know that the IRS has strict timing rules for payments subject to Code Section 409A (but maybe not as strict as you think). The end of the tax year is approaching fast. What to do?

Missing participants can be a problem for benefit plan sponsors in a variety of contexts. Sponsors of qualified plans can turn to IRS and DOL guidance on what do to when a missing participant is owed required minimum distributions or the plan is being terminated and assets must be distributed.

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Section 409A Basics: When is a Payment Date Close Enough?

Code Section 409A(a)(2)(A) prescribes six times or events when deferred compensation may be paid: separation from service, the disability of the participant, the death of the participant, a specified time or fixed schedule specified under the plan, a change in control of the employer, or an unforeseeable emergency.  In explaining and developing these permissible payment rules, the Treasury Regulations contain two special rules that allow some wiggle room (perhaps more than one might think) to an employer in establishing the payment dates or in actually making a payment.  These provisions reflect the recognition on the part of the drafters that it may not be possible or practicable to make a payment precisely on the intended date and minor delays in payment will not materially affect the income taxation of the payments.  We often find ourselves referring to these special rules and offer this brief synopsis and a few observations to those who tangle with deferred compensation on a regular basis.

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Section 409A Basics: Deferral Elections and Discretionary Bonuses

The Final Regulations under Code Section 409A took effect nearly five years ago.  By now those of us who regularly deal with deferred compensation issues have fully internalized the core requirements of Section 409A.  We have even managed to sensitize our clients and other professionals to the possibility that Section 409A issues can arise in a variety of contexts outside the strict parameters of a formal deferred compensation arrangement.  Nevertheless, certain simple questions still cause us to revisit basic Section 409A concepts simply because the answers we produce are frequently jarring (even to us) and frustrating (for employers).  One such question relates to the timing of deferral elections made with respect to discretionary bonuses.

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409A and Linked Elections Following 401(k) Hardship Suspension

Many tax-qualified Section 401(k) plans provide that a participant who takes a hardship distribution pursuant to Treasury Regulation Section 1.401(k)-1(d)(3) is suspended from participating in any qualified or nonqualified deferred compensation plans of the Company for a period of six months.  After the suspension period elective deferrals under some plans automatically recommence without further action by the participant, whereas other plans require participants to make a new election to recommence their elective deferrals. 

The second option may be problematic if the 401(k) plan election is linked to an election to a nonqualified plan (for deferrals exceeding the Section-402(g) limit) because an election under a nonqualified plan to recommence deferrals following a hardship suspension is subject to the rules governing initial deferral elections under the Section 409A regulations. 

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409A Corrections Guidance: Which Year Is Correction Completed?

Relief for nonqualified deferred compensation plan operational failures made pursuant to Internal Revenue Service guidance under Section 409A requires certain information reporting by affected employers and participants.  It is important to promptly correct any discovered errors, as fewer requirements apply with respect to corrections of failures completed during the taxable year in which the failure occurs.  For example, a failure corrected in December (same taxable year) may face fewer requirements than a correction completed in early January (a subsequent taxable year), even if the amount involved is less than the elective deferral limit.  If the correction was made during the year after the operational failure, IRS guidance generally requires that the employer attach an information statement (with additional content) to its tax return for that year, and to provide an information statement to any affected participants (noting eligibility for relief being sought) by January 31st, and each taxpayer (i.e., employer and affected participant) must be prepared to note the statement, and the relief obtained, should the return be audited at a future date.  If the correction was made during same taxable year as the operational failure, IRS 409A corrections guidance generally requires that the employer attach an information statement to its tax return for the year the failure was discovered, whenever timely filed.  The employer also must be prepared to disclose the statement, and the relief obtained, should the corporate return be audited at a future date.