Question

Accounting Question (Employee Benefit Tax Planning)

1. IRC Section 409A has 3 requirements that all non-qualified deferred compensation arrangements must meet in order to avoid noncompliance. What are those requirements?

Answer 1

Section 409A of the Internal Revenue Code imposes a fixed compensation payable to the service provider to the service provider, which is usually taxed at 20% when certain design or operational rules are violated. Service providers are usually employers, but independent contractors are also service providers. Service providers include executive officers, employees, some independent contractors and member service providers. Section 409A distinguishes between deferred indemnity plans and indemnity periods.

Section 409A directs the deferment of compensation until the appropriate profit is in the category of compensation, which the IRS considers improper deferred compensation.

409A is difficult to penalize for non-compliance. Losses after vesting are placed under non-behavioral plans or arrangements regular federal income tax, 20% excise tax vesting penalty interest are all taxes and interest paid by the customer is not deferred compensation.

Internal tax revenue section 409A generally applies to workers the right to legally enforce taxpayer compensation for services received during the entire tax year, but does not include income within that year or the first half month of the following year. This is called "non-qualified deferred compensation." If you are late in meeting the requirements of section 409A, the compensation arrangement may be included in taxable income. There is no problem with getting a fixed salary - and some additional taxes, plus 20 percent extra federal income tax will apply.