The IRS updated its Nonqualified Deferred Compensation Audit Techniques Guide (the “2021 Guide”) in June 2021. The 2021 Guide replaces a similar guide that was published in June 2015.
The 2021 Guide does not shed new light on the standing or treatment of nonqualified plans under the Internal Revenue Code (“Code”) or resolve any open issues under Section 409A of the Code (“Section 409A”). Rather, the 2021 Guide is a user-friendly document – drafted to highlight some issues that are the foundation of nonqualified deferred compensation plans and clearly intended to be used as a reference to assist IRS auditors as they audit nonqualified deferred compensation plans. Below, we discuss some questions that our clients have asked in connection with the publication of the 2021 Guide.
At a very high level, and consistent with the description in the 2021 Guide, a nonqualified deferred compensation plan is an elective or non-elective plan, agreement, method, or arrangement between an employer and an employee (or service recipient and service provider) to pay the employee compensation in the future, other than pursuant to a qualified plan or certain other specified plans. Nonqualified deferred compensation plans are subject to Section 409A unless a specific exemption is met.
The 2021 Guide does a good job of reminding us that a nonqualified deferred compensation plan can come in many forms including:
Note: As the 2021 Guide reminds us, phantom stock plans are nonqualified deferred compensation arrangements, not stock arrangements. Therefore, depending on their terms and conditions, they may be subject to Section 409A.
We do not know.
What we do know is that (i) audit activity in this area has declined in recent years, but that the IRS has requested substantial budget increases, (ii) Congress may be inclined to encourage more enforcement in this area to help fund certain other government initiatives, and (iii) with this new 2021 Guide, the IRS is prepared to audit more nonqualified deferred compensation plans.
Take stock of your existing and future nonqualified deferred compensation arrangements.
Depending on how deep a dive you are willing to take, this could include reviewing some or all of the following: