Two deadlines are approaching for all tax-exempt and government employers. The first is the October 15, 2007 deadline for comment to the Internal Revenue Service regarding the recent announcement that it anticipates issuing guidance that will in essence prohibit any elective deferral of compensation by an employee to any non-qualified deferred compensation other than a section 457(b) plan. The second is December 31, 2007 deadline for employers and employees having non-qualified deferred compensation arrangements to bring those arrangements in compliance with section 409A.
October 15, 2007 Deadline
On August 6, 2007, the Internal Revenue Service and Department of Treasury published a notice announcing that they are anticipating issuing guidance, likely in the form of Treasury Regulations, that will penalize tax-exempt and governmental employers and employees by in essence:
- Prohibiting any elective deferral of compensation by employee to any non-qualified deferred compensation other than a section 457(b) plan which is limited to $15,500 for 2007; and
- Limit any severance arrangements for employees to involuntary terminations and to a dollar amount not to exceed two-times the employee’s annual rate of pay, subject to a maximum dollar amount equal to the limit on compensation that may be taken into account under qualified retirement plans.
The notice also states that the guidance (or resulting Treasury Regulations) will be prospective.
Issuance of any such Treasury Regulations will further widen the gap between tax-exempt and government employers, on one part, and taxable employers, on the other, because taxable employers will not be subject to this guidance or any resulting Regulations.
Written comments are invited and must be submitted by October 15, 2007 to:
CC:PA:LPD:PR (Notice 2007-62)
Internal Revenue Service
PO Box 7604, Ben Franklin Station
Washington, DC 20044
December 31, 2007 Deadline
On April 10, 2007, the Internal Revenue Service and Department of Treasury issued the long-awaited final Treasury Regulations under Internal Revenue Code section 409A. Under those final Regulations, employers and employees having non-qualified deferred compensation arrangement have until December 31, 2007, to bring those arrangements into compliance with section 409A.
Section 409A defines non-qualified deferred compensation broadly to include any payment that is, or can be made, in one taxable year that is for services performed in a prior taxable year. Such payments can include the following:
- Signing and, especially, retention bonuses that are not paid contemporaneously with the service;
- Any form of salary or bonus forbearance or deferral by an employee where he or she retains some legal right to future payment
- Severance arrangements or continuation pay
- Disability continuation pay
- Supplemental retirement provisions or SERPs
- Phantom stock, stock appreciation, stock option, and other similar arrangements
- Long-term incentive plans where the performance period is more than one year
other than pursuant to qualified plans such as 401(a), 401(k), 403(a), 408(k), and 408(p) plans and 403(b) annuities
Failure to comply with section 409A will result in substantial penalties on the employee. Section 409A imposes an additional tax equal to (i) 20 percent of the deferred compensation plus (ii) interest at a rate of 1 percentage point above the underpayment rate on the underpayment of taxes, retroactive, in most cases, to the taxable year in which the services were performed. This is in addition to income taxation at ordinary rates on the deferred amount and the underpayment penalty and underpayment interest at the regular underpayment rate on the underpayment of those income taxes as well as, if not previously paid, Social Security and Medicare taxes on the deferred compensation and the underpayment penalty and the underpayment interest at the regular underpayment rate on the underpayment of Social Security and Medicare taxes.
Any such arrangements, whether evidenced by an employment agreement or separate agreement with an individual employee, or in a plan or similar document covering multiple employees, should be reviewed in light of the requirements of section 409A in order to allow time for changes in order to assure compliance by December 31, 2007.