The IRC §409A Minefield
by James F. McDonough, Jr. on September 11, 2013
Tax professionals frequently encounter non-qualified deferred compensation plans (“NQDCA”) in the context of an estate or business. NQDCA’s include any arrangement where an employee or a service provider (independent contractor) receives a legally binding right to receive compensation in one year but it is not actually received until a later year. A legally binding right includes those situations where the service provider has the right to receive income if conditions are met. The inherent problem is that many plans in place have not been reviewed for compliance and have not been modified to satisfy these rules. The consequences of an IRC §409A violation are severe and include a back income tax, interest from the original date of deferral, and a penalty equal to 20% of the deferred compensation.
§409A was enacted in 2004 and regulations, consisting of nearly 400 pages, were issued in 2007. §409A also applies to a NQDCA between a partnership and its employees. Partnership equity awards are covered by a separate set of rules, at least for now.
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