Question

Accounting Question (Employee Benefit Tax Planning)

1. IRC Section 409A has 3 requirements that all nonqualified 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 indemnity payable by the service provider for payment to the service provider, usually imposing a 20% tax when certain design or operational rules are violated. The service providers are typically employers, but independent contractors are also the service providers. Service providers include executive officers, employees, some independent contractors and member service providers. Section 409A distinguishes between deferred indemnity plans and indemnification periods.

Section 409A directs that deferred indemnity unless it falls within the category of qualified profit compensation, which the IRS considers to be an improper deferred compensation.

The penalty for not complying with 409A is difficult. After vesting, the damages are kept under compensation Non-behavioral plans or arrangements Regular federal income tax, 20% excise tax vesting penalty interest is all taxes and interest paid by the consumer is not deferred compensation.

Internal Revenue Clause 19A generally applies to workers' right to legally enforce taxpayer's compensation for services received during the entire tax year, but does not include income within that year or within the first two and a half months of the following year. This is called "non-qualified deferred compensation." If there is a delay in meeting the requirements of section 19A, the compensation system can be included in the taxable income. There is no difficulty finding such a fixed salary - and will be subject to some additional taxes plus a 1 percent additional federal income tax.