Deferred Compensation Plans Under Section 409A

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 indicates 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.