New rules for nonqualified deferred compensation plans under Internal Revenue Code Sec. 409A went into effect on Jan. 1, 2005. Recently, the IRS issued final regulations to provide guidance on the rules. Grant Thornton LLP has developed a Quick Reference Guide to Complying with the Sec. 409A Deferred Compensation Plan Rules that provides seven suggested steps to help companies comply with the rules.
Step 1: Identify arrangements that provide for a deferral of compensation
Step 2: For each arrangement, decide between removing the deferral of compensation and complying with the rules
Step 3: Design each arrangement to comply with the rules
Step 4: Develop and implement policies and administrative procedures
Step 5: Prepare written plan by Dec. 31, 2007
Step 6: Obtain service provider elections as to time and form of payment by Dec. 31, 2007
Step 7: Evaluate compliance for the period between Jan. 1, 2005 and Jan. 1, 2008
"It's very important that companies take these steps to comply," said Edgar Adkins, a tax partner and the compensation and benefits technical practice leader in Grant Thornton's National Tax Office in Washington, DC. "If they don't do so, employees face immediate taxation, plus a 20 percent penalty and interest. Unfortunately, non-compliance is a very real possibility, because the rules are complex, and because many companies do not realize that the rules apply to a very broad range of compensation and benefits arrangements."
The Quick Reference Guide to Complying with the Sec. 409A Deferred Compensation Plan Rules offers additional details on each of the seven steps. To download the full guide, go to www.GrantThornton.com/cbcquickrefguides.