Deferred Compensation After IRC Section 409A

Abstract

Internal Revenue Code Section 409A was enacted by the American Jobs Creation Act of 2004 on October 22, 2004. IRC §409A was enacted by Congress to prevent perceived abuses by executives and corporations of deferred compensation amounts. Recent corporate scandals, along with the perception that executives were receiving preferential treatment from trustees shortly before bankruptcy filing, prompted the Treasury Department to broadly reform the taxation of deferred compensation. The new law requires that deferred compensation arrangements must meet specific restrictions to avoid immediate taxation. IRC §409A also provides that previous nonqualified deferred amounts could be currently taxable and subject to excise taxes and interest penalties unless certain requirements are met. All companies with deferred compensation plans or considering implementing such plans will have to comply with the new rules. In addition, these rules also impact all equity-based compensation such as bonuses, restricted stock, and stock options. These plans should be carefully reviewed to ensure compliance. Otherwise, the executives could be subject to a 20% excise tax.