409A Deferred Compensation & 457 Regulations (Government & Tax-Exempt)

409A Deferred Compensation & 457 Regulations 


The IRS recently proposed regulations for Section 409A for nonqualified deferred compensation plans and 457(f) regulations for deferred compensation plans of state and local governments and tax-exempt entities.


Section 409A of the Internal Revenue Code is a set of rules that govern nonqualified deferred compensation plans. The new proposed regulations for 409A pertain to explicit requirements and is not meant as a general revision or substantial change, rather, it’s intended to be applicable on the finalization date or following dates.  Taxpayers can trust the proposed regulations until final regulations are published.  On the other hand, Section 457 plans are unfunded deferred compensation plans established by state and local government and tax-exempt employers.  That said, Section 457 and Section 409A’s proposed regulations are vital for selling and implementing nonqualified deferred compensation.


What does this mean for you? This potentially applies to salaries, bonus deferral plans, nonqualified retirement payments or benefits including Section 457(f) plans, severance arrangements, incentive compensation or retention arrangements, split dollar plans, and independent contractor agreements.


It’s often recommended that deferred compensation is financed by life insurance to attract, retain, and reward key executive talent. It’s also imperative that that employers seek their counsel and life insurance agents to stay on top of these types of regulations. Furthermore, according to WRNewswire: “Section 409A is a tax minefield laid for those employers who sponsor employee benefit plans with deferred compensation elements and for the participants in these plans. If an employer provides benefits to an employee that are subject to Section 409A but under a noncompliant plan, the participating employee will be subject to federal income tax results sooner than expected or desired, and will also be liable for a twenty percent federal penalty tax.”


Also, regarding the joint application of Sections 409A and 457, WRNewsire states that “the proposed regulations address important issues about the application of Section 457(f), including 1) defining what constitutes bona fide severance pay (2) death and disability plans excluded from compensation (3) adding a short-term deferral exclusion, and (4) clarifying the meaning of the term, ‘substantial risk of forfeiture.’ ” These proposed regulations will become effective when published as final regulations.


Proposed regulation areas that will need guidance:


1) Joint application of Sections 409A and 457

2) Clarification of short-term rules and legally required delays

3) Definition of service recipient stock clarified

4) Modification of rules following death

5) Plan termination rules clarified

6) Corrections applicable to unvested amounts

7) Transaction based compensation rules and exempt tax stock rights

8) Termination of service clarified

9) Other changes including recurring part-time and/or part year compensation, payment to comply with Federal debt, applicability dates, service provider entities, account balance plans, defined benefit plans, providing reimbursement of reasonable attorney fees, etc.


Contact EBN for further information today!