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Section 409A Toolkit
Practical Law Toolkit 1-500-6652 (Approx. 7 pages)
Section 409A Toolkit
by Practical Law Employee Benefits & Executive Compensation
| Maintained • USA (National/Federal) |
Resources to assist employers and practitioners in complying with Section 409A of the Internal Revenue Code. Section 409A sets out complex rules governing nonqualified deferred compensation and impacts the ways in which compensation arrangements can be structured.
Section 409A regulates a broad range of nonqualified deferred compensation arrangements (26 U.S.C. § 409A). Its reach extends beyond traditional elective deferral plans and impacts numerous other arrangements, including:
- Supplemental executive retirement plans.
- Employment agreements.
- Bonus plans.
- Incentive awards.
- Equity plans.
- Severance plans.
- Perquisites.
- Post-termination health benefits.
If a compensation arrangement or payment violates the requirements of Section 409A, the tax consequences imposed on the employee are severe:
- Compensation under the non-compliant arrangement and any similar arrangements that must be aggregated with it under Section 409A's rules are included in income once vested.
- A 20% penalty tax is imposed on the amount involved.
- Additional interest penalties may be imposed.
The Internal Revenue Service issued two correction procedures for certain violations of Section 409A addressing:
- Operational failures (for example, if payments were made before their designated payment date).
- Documentary failures (for example, if a plan document contains terms that violate Section 409A).
If a timely correction is made, the employee can avoid some or all of the adverse tax consequences.
The Section 409A Toolkit includes continuously maintained resources designed to help employers and practitioners:
- Draft compensation arrangements that comply with Section 409A.
- Structure compensation arrangements to fit within an exception from Section 409A's coverage.
- Recognize and avoid common Section 409A pitfalls.
These resources also address available correction methods for violations of Section 409A.