New Laws for Nonqualified Deferred Compensation

Small Business Tax News

November 2009

By Lance Wallach

This regulation is now under Internal Revenue Code Section 409(a). The employees have until December 31s, 2009 to make their elections for compensation to be received in 2010.

            In the first year in which a participant is eligible to participate in a plan, they make an election within 30 days after the date of eligibility, but only with respect to compensation earned subsequent to the election.

            In addition, in the case of any performance-based compensation covering a period of at least 12 months, a participant may make an election no later than six months before the end of the covered period.

            A plan may allow a participant to elect to delay a scheduled distribution from a plan if the new election is made at least 12 months in advance and delays the distribution at least five years. Within the five years, a premature distribution may only be made on account of death, disability or unforeseeable emergency.

            A plan may permit the acceleration of payment in only a few circumstances listed below:

• To pay employment taxes imposed on compensation deferred under the plan;

• To comply with a domestic relations order;

• To pay income taxes due upon a vesting event under a plan subject to IRC Section 457(f);

• To comply with a conflict-of-interest divestiture requirement (see IRS Section 1043);

• To reflect inclusion in income under IRC Section 409(a)

• To terminate a participant’s interest in a plan:

•  Where the payment is not greater than the elective deferral limit under IRC Section 402(g)(1)(B) ($15,500 in 2008, $16,500 in 2009);

•  In the 12 months following a change in control event;

•  Where all arrangements of the same type are terminated;

•  Upon a corporate dissolution or bankruptcy;

• To end a deferral election following an unseen emergency.

            A nonqualified deferred compensation plan is retroactively taxable to the participant as of the time of the initial deferral. In addition to the normal income tax on the compensation, the participant must pay an additional 20-percent tax, as well as interest at a rate 1 per higher than the normal underpayment rate.

Lance Wallach, National Society of Accountants Speaker of the Year and member of the AICPA faculty of teaching professionals, is a frequent speaker on retirement plans, financial and estate planning, and abusive tax shelters.  He writes about 412(i), 419, and captive insurance plans. He speaks at more than ten conventions annually, writes for over fifty publications, is quoted regularly in the press and has been featured on television and radio financial talk shows including NBC, National Pubic Radio’s All Things Considered, and others. Lance has written numerous books including Protecting Clients from Fraud, Incompetence and Scams published by John Wiley and Sons, Bisk Education’s CPA’s Guide to Life Insurance and Federal Estate and Gift Taxation, as well as AICPA best-selling books, including Avoiding Circular 230 Malpractice Traps and Common Abusive Small Business Hot Spots. He does expert witness testimony and has never lost a case. Contact him at 516.938.5007, wallachinc@gmail.com or visitwww.taxaudit419.com.

The information provided herein is not intended as legal, accounting, financial or any type of advice for any specific individual or other entity. You should contact an appropriate professional for any such advice.