New IRC SEC 409A Rules
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Subject: IRC 409A
Due Date: Action is required on behalf of all companies with a “Non-Qualified Deferred Compensation” program no later than January 1, 2009.
Section 409A was enacted in October 2004 and was generally effective on Jan. 1, 2005. Section 409A applies to compensation that workers earn in one year but that is not paid until a future year. This is referred to as nonqualified deferred compensation. However, section 409A does not apply to qualified plans (such as a section 401(k) plan) or to a section 403(b) plan or a section 457(b) plan.
Extension: According to Notice 2007-86 “Notice of Additional 2008 Transition Relief under Section 409A,” additional transition relief regarding the application of section 409A of the Internal Revenue Code to nonqualified deferred compensation plans. Generally, this notice extends to December 31, 2008, the transition relief that was scheduled to expire on December 31, 2007, as provided in Notice 2006-79, 2006-43 IRB 307, and the preamble to the final regulations under section 409A (72 Fed. Reg.19234 (April 17, 2007)) (the final regulations preamble).
Background: Section 409A was added to the Internal Revenue Code (Code) by section 885 of the American Jobs Creation Act of 2004, Public Law 108-357 (118 Stat.1418). Section 409A generally provides that unless certain requirements are met, amounts deferred under a nonqualified deferred compensation plan for all taxable years are currently includible in gross income to the extent not subject to a substantial risk of forfeiture and not previously included in gross income. Section 409A also includes rules applicable to certain trusts or similar arrangements associated with a nonqualified deferred compensation plan, where such arrangements are located outside of the United States or are restricted to the provision of benefits in connection with a decline in the financial health of the sponsor.
Full Details of IRC 409A: http://www.irs.gov/irb/2007-19_IRB/ar07.html
Issue: Non-compliance with Sec 409A will result in penalties and interest. Companies are limited to penalties and interest on reporting and withholding errors. Section 409A penalties and interest apply to the INDIVIDUAL taxpayer, not the company. However, the international assignees will likely push back on their company to pay these penalties and interest.
The penalties and interest will be assessed on all compensation deferred under the “plan.” And since “plan” is defined on the aggregate basis, violation of one plan results in violation of all similar plans…
Interest will be assessed from the date the income should have been deferred.
A penalty of 20% will be assessed.
International Assignees Specifics
Areas of compensation to be reviewed:
- Retirement Plans – Consult with your benefits advisor
- Equalization – The proposed regulations excluded from coverage under section 409A certain arrangements, referred to as tax equalization arrangements, that provide for payments intended to compensate the service provider for the excess of taxes actually imposed by a foreign jurisdiction on the compensation paid over the taxes that would be imposed if the compensation were subject solely to United States Federal income tax, subject to certain requirements. The final regulations adopt these provisions, subject to modifications. Based upon the comments received, the final regulations generally expand the exclusion in two respects. First, the final regulations extend the tax equalization payments exception to cover reimbursements of U.S. taxes that exceed foreign taxes. Second, the final regulations provide that the payment must be made by the end of the second taxable year of the service provider following the latest of the deadline for filing a U.S. Federal tax return or the deadline for filing foreign tax returns (or if a foreign return is not required to be filed, the due date for foreign tax payments) reflecting the compensation for which the tax equalization payment is provided.
To comply, payments must be made no later than the end of the second calendar year beginning after the calendar year in which the individual’s U.S. income tax return is required to be filed for the tax equalization year or the end of the second taxable year in which the individual’s foreign income tax return or payment is required to be filed (including extensions) for the tax equalization year.
- Gross-ups – The final regulations provide that a right to a tax gross-up payment is a right to deferred compensation that satisfies the requirement of a fixed time and form of payment if the plan provides that the tax gross up payment will be made, and the payment is made, by the end of the service provider’s taxable year next following the service provider’s taxable year in which the related taxes are remitted to the taxing authority.
To comply, one need only ensure that all Tax gross-up payments are made by the end of the individual’s taxable year following the year in which the individual’s taxes are remitted.
- Assignment policy allowances/benefits (tax prep services, education, housing, relocation, etc.)
To comply, ensure that all payments are made on or before the last day of the individual’s taxable year following the year in which the expense incurred.
- Foreign plans that aren’t qualified – Consult with your benefits advisor
- Foreign social taxes – Exempt, provided that amounts are deferred under a government mandated social security system.
Complying with this new law is simple in most cases. We recommend you simply insert the following 2 paragraphs in your company’s Tax Equalization policy as soon as possible:
Employee will be held to a hypothetical tax during assignment on all company sourced income and non company sourced income, and Employer agrees to pay all actual US and foreign taxes on company sourced income as well as non company sourced income up to $??,??? only. Equalization settlements will occur no later than the year following the tax year covered, in order to comply with IRC 409A.
Employees who fail to timely file their tax returns and reimburse the equalization payment to the company shall be responsible for penalty and interest charges under IRC 409A on all income, including company sourced.
And finally, be sure to make the payments in accordingly.
This reference is in general and is no way a legal conclusion of the specifics of your case. You may want to consider a full review of our company’s international assignment and tax equalization policies.
If you have any problems, questions, or concerns, with this tool or any other tools please do not hesitate to contact us at info@GEMMS.us.