Mastering New Section 409A and 457(f) Deferred Compensation Rules: Calculating and Reporting Includible Amounts

Description

Tax advisers serving clients who have deferred compensation under a nonqualified deferred comp plan must be aware of the income inclusion rules under Section 409A and its counterpart for exempt organization employees, Section 457(f). IRS rules on deferrals from nonqualified plans require taxpayers to include in taxable income any compensation amounts deferred when a “triggering event” creates a lapse in the "substantial risk of forfeiture (SROF)” of the deferred compensation.

In June, 2016 the IRS issued proposed separate sets of proposed regulations for Sections 409A and 457(f).  Both proposed regulations intend to clarify the SROF rules; however, the new rules governing Section 457(f) differ from the 409A regs, specifically in the treatment of non-compete clauses and short-term deferrals. Tax advisers should be aware of the new standards to avoid costly tax mistakes due to failure to include reportable amounts.

The IRS initiated a "compliance initiative project" to check compliance with Section 409A and 457(f) rules in 2014, and the new regulations signal that the IRS will continue its scrutiny of deferred compensation under nonqualified plans. Since the penalties for noncompliance are steep, and the regulations mandate disclosures from both employers and employee/service providers, tax advisers need to be fully aware of the operations and reporting requirements of 409A and 457(f) deferred amounts to avoid costly tax consequences.

Listen as our experienced panel provides a thorough and practical guide to the current rules governing 409A and 457(f) deferrals.