Section 409a Of The Internal Revenue Code

An internal revenue code section 409a primer by tony ling and galen mason1 the american jobs creation act of 2004 was signed into law on october 22 2004.

Section 409a of the internal revenue code. Inclusion in gross income of deferred compensation under nonqualified deferred compensation plans. Section 409a of the united states internal revenue code regulates nonqualified deferred compensation paid by a service recipient to a service provider by generally imposing a 20 excise tax when certain design or operational rules contained in the section are violated. Section 409a generally provides that unless certain requirements are met amounts deferred under a nonqualified deferred compensation plan for all taxable years are currently includible in gross income to the extent not subject to a substantial risk of forfeiture and not previously included in gross income.

Section 409a of the internal revenue code is a complex and often counterintuitive set of tax rules applicable to deferred compensation. Deferred compensation exists when an employee consultant or board member has a contractual right to compensation that may be paid in later taxable years and includes many arrangements not typically thought of as deferred compensation e g severance benefits options and other equity awards. Code unannotated title 26.

For purposes of the preceding sentence a specified employee is a key employee as defined in section 416 i without regard to paragraph 5 thereof of a corporation any stock in which is publicly traded on an established securities market or otherwise. 409a affects nonqualified retirement plans and other deferred compensation arrangements. 409a u s.

In 2004 the us congress passed the american jobs creation act creating section 409a of the internal revenue code section 409a in response to a perceived abuse of deferred compensation arrangements that were in the media spotlight in the wake of several significant corporate scandals at the time. Service recipients are generally employers but those who hire independent contractors are also service recipients. It created a new section 409a of the internal revenue code 409a and the code respectively.

Executive employment and severance pay under section 409a of the internal revenue code 05 22 07 effective generally january 1 2005 congress set off a sea change in the tax treatment of nonqualified deferred compensation arrangements with the adoption of new section 409a of the internal revenue code. 409a a 2 b ii unforeseeable emergency. Many employment law attorneys and human resource professionals are surprised to learn that section 409a of the internal revenue code section 409a which was enacted to curb abuses related to deferred pay arrangements for high ranking executives also impacts arrangements that defer pay only incidentally and arrangements that are broad based across an employee population.