Law.com Subscribers SAVE 30%

Call 855-808-4530 or email [email protected] to receive your discount on a new subscription.

Deferred Compensation Plans under Section 409A

By Lawrence L. Bell
November 02, 2014

The American Jobs Creation Act (AJCA), signed into law on Oct. 22, 2004, created new restrictions on compensation arrangements. New Section 409A of the Internal Revenue Code (IRC) applied to compensation deferred under a non-qualified deferred compensation plan after Dec. 31, 2004. Congress directed the Internal Revenue Service (IRS or Service) to provide guidance within 60 days of enactment. The IRS issued Notice 2005-1 on Dec. 21, 2004, as revised on Jan. 6, 2005.

Section 409A applies to any arrangement that postpones payments of compensation to subsequent years. The Notice spells out what is and is not deferred compensation, Single-person Plans, “defined benefit” non-qualified plans, Supplemental Executive Retirement Plans (SERPs) and arrangements for non-employees (directors, trustees and independent contractors). See, Q&A3. Previously, government and non-profit organizations were required only to follow IRC '457 with eligible and ineligible plans. Section 457(b) plans, like qualified plans, will not have to follow '409A. Ineligible plans previously governed solely under '457(f) now will have to follow '409A also.

There are also specific statutory exceptions to the application of these new non-qualified deferred compensation rules. Question 3 of the Notice spells out what benefit arrangements do not have to comply with '409A's rigorous tests; a death benefit plan and a disability plan that comply with the definitions of Tax Regulations '31.3121(v)(2)-1(b)(4)(iv)(C). These definitional requirements provide a bright line mechanical test that will permit compliance with the laws. The language in these safe harbors indicate that where there is more life insurance death benefit or funding available upon a disability than the present value of any forum of additional benefit, i.e., cash value available if a person doesn't die or is not disabled, then the program complies. These provisions will permit compliance with '409A and converting a non deductible item at the Plan Sponsor level into a substantially deductible expense and creating tax at the particpant level of only the economic benefit as set forth under the IRC.

This premium content is locked for Entertainment Law & Finance subscribers only

  • Stay current on the latest information, rulings, regulations, and trends
  • Includes practical, must-have information on copyrights, royalties, AI, and more
  • Tap into expert guidance from top entertainment lawyers and experts

For enterprise-wide or corporate acess, please contact Customer Service at [email protected] or 877-256-2473

Read These Next
Major Differences In UK, U.S. Copyright Laws Image

This article highlights how copyright law in the United Kingdom differs from U.S. copyright law, and points out differences that may be crucial to entertainment and media businesses familiar with U.S law that are interested in operating in the United Kingdom or under UK law. The article also briefly addresses contrasts in UK and U.S. trademark law.

The Article 8 Opt In Image

The Article 8 opt-in election adds an additional layer of complexity to the already labyrinthine rules governing perfection of security interests under the UCC. A lender that is unaware of the nuances created by the opt in (may find its security interest vulnerable to being primed by another party that has taken steps to perfect in a superior manner under the circumstances.

Strategy vs. Tactics: Two Sides of a Difficult Coin Image

With each successive large-scale cyber attack, it is slowly becoming clear that ransomware attacks are targeting the critical infrastructure of the most powerful country on the planet. Understanding the strategy, and tactics of our opponents, as well as the strategy and the tactics we implement as a response are vital to victory.

Legal Possession: What Does It Mean? Image

Possession of real property is a matter of physical fact. Having the right or legal entitlement to possession is not "possession," possession is "the fact of having or holding property in one's power." That power means having physical dominion and control over the property.

The Anti-Assignment Override Provisions Image

UCC Sections 9406(d) and 9408(a) are one of the most powerful, yet least understood, sections of the Uniform Commercial Code. On their face, they appear to override anti-assignment provisions in agreements that would limit the grant of a security interest. But do these sections really work?