The IRS has been very busy issuing guidance under section 409A of the Internal Revenue Code. The most recent notice (Notice 2007-89) generally continues for 2007 the section 409A withholding and reporting rules that were in place for 2005 and 2006. (Notice 2007-89 does not affect the FICA withholding and reporting rules.)
1. Deferrals of Compensation for 2007.
This paragraph applies to reporting deferrals of compensation subject to section 409A – even though the section 409A requirements are met and the amounts are not included in gross income. For 2007, no deferrals are required to be reported. Unless additional relief is provided, section 409A deferrals for 2008 must be reported:
- In box 12 (code Y) of Form W-2, for an employee or former employee; or
- In box 15a of Form 1099-MISC, for a nonemployee (e.g., a director or independent contractor).
Accordingly, the company (or its recordkeeper) should have a process in place for tracking deferrals made for 2008.
2. Amounts Included in Income in 2007 Because of Section 409A Failure.
This paragraph applies when there is a section 409A failure that results in deferred compensation being includible in gross income for 2007. If there is a section 409A failure, compensation deferred under the plan for the taxable year and all preceding taxable years is includible in gross income for the taxable year to the extent the section 409A deferred compensation is “vested” and has not previously been included in gross income. Amounts includible in gross income under section 409A in 2007 are reported:
- For an employee or former employee:
- In box 1 and box 12 (code Z) of Form W-2; and
- On line 2 of Form 941 (Employer’s Quarterly Federal Tax Return).
- For a nonemployee, in box 7 and box 15b of Form 1099-MISC.
For an employee (or former employee), amounts includible in income under section 409A in 2007 are treated as supplemental wages for purposes of determining the amount of income tax to be withheld. The amount required to be withheld is not increased by the other adverse tax consequences of a section 409A failure – the 20% additional tax and the underpayment of “interest” component.
For section 409A amounts includible in income during 2007, the amount subject to withholding (in the case of an employee or former employee) and the amount to be reported depends on the type of nonqualifi ed deferred compensation plan the failure occurred under. Different rules apply to account balance plans, nonaccount balance plans, stock rights and other deferred amounts. Please contact us should there be a 409A failure so that we can provide guidance regarding the calculation of this amount.
For an employee (or former employee), the withholding, depositing and reporting requirements relating to a section 409A failure are triggered on the date the amount is actually (or constructively) received during 2007. If, however, the employee (or former employee) does not receive a payment of deferred amounts in connection with the section 409A failure, the withholding, depositing and reporting requirements are triggered on December 31, 2007; and two methods, too complex to describe here, are provided for employers to avoid penalties for failure to deposit taxes if the employer does not withhold suffi cient income tax as of December 31, 2007.