Sec. 409A prop. regs. and guidance for noncompliant plans.

• Author: Nevius, Alistair M.

The IRS has issued proposed regulations on failures to comply with the timing rules of Sec. 409A (REG-148326-05). The Service also issued guidance on reporting and withholding requirements for amounts includible in income under Sec. 409A (Notice 2008-115).

Sec. 409A generally provides that if certain requirements are not met at any time during a tax year, amounts deferred under a nonqualified deferred compensation (NQDC) plan for that year and all previous tax years are currently includible in the service provider's (i.e., the employee's) gross income to the extent they are not subject to a substantial risk of forfeiture and were not previously included in gross income.

Final regulations under Sec. 409A took effect January 1, 2009, but the final regulations do not address the calculation of the amount includible in income under Sec. 409A if a plan fails to meet the Sec. 409A requirements. The final regulations also do not address how to calculate the additional taxes applicable to such income. The proposed regulations address the calculation of these amounts and related issues. Notice 2008-115 provides interim guidance on these calculations for tax years beginning in 2008.

Note: The proposed regulations and the notice do not address the application of Sec. 409A(b), which generally applies to a transfer of assets to a trust, or to a restriction of assets, for purposes of paying NQDC, in certain circumstances.

Subsequent Compliance After Failure to Comply

One question the proposed regulations address is how Sec. 409A(a) applies if a plan fails to comply during a tax year and the service provider continues to have amounts deferred under the plan in subsequent years during which the plan otherwise complies with Sec. 409A(a). The language of Sec. 409A could be construed to provide that a failure is treated as continuing during tax years beyond the year in which the initial failure occurred, if the failure continues to affect amounts deferred under the plan.

To prevent this result, under the proposed regulations, a failure to meet the requirements of Sec. 409A(a) during a service provider's tax year generally would not affect the taxation of amounts deferred under the plan for a subsequent tax year during which the plan complies with Sec. 409A(a). This would be true even though the amount deferred under the plan includes amounts deferred during years the plan failed to comply with Sec. 409A(a), as long as there was no failure under the plan in a...