Section 409A Toolkit

Resources to assist employers and practitioners in complying with Section 409A of the Internal Revenue Code. Section 409A governs nonqualified deferred compensation and impacts the way in which compensation arrangements can be structured.

Practical Law Employee Benefits & Executive Compensation

Section 409A ( www.practicallaw.com/1-506-3280) of the Internal Revenue Code regulates a broad range of nonqualified deferred compensation arrangements. 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 provides 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.

These resources also address available correction methods for violations of Section 409A.

 

Practice Note: Overview

 

Practice Notes

 

Standard Documents and Clauses

 

Checklists

 

Articles

 
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