Now's the Time to Comply With NQDC Regs

Help clients avoid problems with nonqualified deferred compensation.

May 2008
by Michael Stevens/Journal of Accountancy

In April 2007, the IRS issued final regulations under section 409A pertaining to nonqualified deferred compensation (NQDC) plans. The regulations represent a culmination of efforts to bring uniformity to a field that Congress believed was too prone to abuse of income timing, especially by executives and other highly compensated individuals.

But despite reams of guidance so far, efforts in Washington are far from over, and many affected companies may be just beginning to comply with the regs, as transition relief has extended the effective date of most provisions. CPAs and others administering employee benefits must therefore master this voluminous new body of regulations and help companies and individuals achieve and monitor compliance. Failure to satisfy the regulations' requirements by Dec. 31, 2008, can result in severe consequences.

What NQDC Is and Is Not

IRC § 409A, enacted in 2004, and related regulations, govern the timing of elections, distributions and funding to avoid inclusion by the "service provider" of deferred income at an employee's vesting. The regs establish rules for constructive receipt of income deferred under a nonqualified plan. If the plan fails to meet certain requirements or is not operated according to them, then all income deferred under the plan "to the extent not subject to a substantial risk of forfeiture" becomes includible in gross income in the year of the failure. An additional excise tax of 20 percent of the amount of compensation required to be included may be imposed, plus any interest.

"Service provider" most often means an employee, but can also refer to a corporate entity. Payments to independent contractors with multiple clients usually will not be subject to section 409A, under rules of Treas. Reg. § 1.409A-1(f). NQDC doesn't include qualified employer plans, such as a 401(k) retirement plan or any bona fide vacation leave, sick leave, compensatory time, disability pay or death benefit plan.

This article has been excerpted from the Journal of Accountancy. Read the full article here.