IRS representatives have recently announced that the IRS has begun a compliance initiative project to check compliance with section 409A of the Internal Revenue Code (“409A”). Initially, Information Document Requests (IDRs) will be sent to a group of less than 50 large companies selected from a pool of employers that have already been selected for employment tax audits. These companies were chosen based on the high likelihood of having deferred compensation arrangements subject to 409A. The IRS will gather information regarding general compliance with 409A and work to refine their audit techniques for future use. The project will be of limited scope and will review the following three issues: (1) initial deferral elections, (2) subsequent deferral elections and (3) compliance with 409A’s distribution requirements, including the requirement to delay certain payments to specified employees of public companies by six months. The focus of the 409A audits will be on each company’s ten highest paid individuals.
Despite this recent uptick in IRS scrutiny of deferred compensation arrangements, we are not suggesting that you hire counsel to review all of your current plans and arrangements for documentary compliance, especially if you have received ongoing legal advice regarding 409A compliance since it was first effective. However, this is a good opportunity to ensure that you are in operational compliance with 409A in a few key areas that are the focus of this first audit initiative. In particular, we recommend that you review the methods used to identify your specified employees. As a reminder, public companies should be identifying their specified employees annually and using a consistent compensation definition in assembling your list of specified employees. Furthermore, your specified employees should be counted using your entire controlled group. In addition, if you have permitted re-deferrals of compensation under a plan, we suggest ensuring that your documentation and election timing meet the requirements of the 409A regulations, as this subsequent deferral of compensation is an area of emphasis by the IRS in the current audits, and likely in future audits as well.
The IRS is using the upcoming limited scope 409A audits as a compliance check and as a way to plan for future audits in this area.