New Laws for Nonqualified Deferred Compensation By: Lance Wallach

Small Business Tax News

This regulation is now under IRC Section 409(a). The employees had until December 31, 2008 to make their elections for compensation to be received in 2009.

In the first year in which a participant is eligible to participate in a plan, they may make an election within 30 days after the date of eligibility, but only with respect to compensation earned subsequent to the election. In addition, in the case of any performance-based compensation covering a period of at least 12 months, a participant may make an election no later than six months before the end of the covered period.
A plan may allow a participant to elect to delay a scheduled distribution from a plan if the new election is made at least 12 months in advance and delays the distribution at least five years. Within the five years, a premature distribution may only be made on account of death, disability or unforeseeable emergency.

A plan may permit the acceleration of a payment in only a few circumstances listed below.

- To pay employment taxes imposed on compensation deferred under the plan
- To comply with a domestic relations order

- To pay income taxes due upon a vesting event under a plan subject to IRC Section 457(f)
- To comply with a conflict-of-interest divestiture requirement (see IRC Section 1043)
- To reflect inclusion in income under IRC Section 409(a)
- To terminate a participant’s interest in a plan:

o Where the payment is not greater than the elective deferral limit under IRC Section 402(g)(1)(B) ($15, 5000 in 2008, $16,5000 in 2009)
o In the 12 months following a change in control event
o Where all arrangements of the same type are terminated
o Upon a corporate dissolution or bankruptcy

- To end a deferral election following an unforeseen emergency

A nonqualified deferred compensation plan is retroactively taxable to the participant as of the time of the initial deferral. In addition to the normal income tax on the compensation, the participant must pay an additional 20-percent tax, as well as interest at a rate 1 percent higher than the normal underpayment rate. *For further information, or to contact this author, please leave a comment and your e-mail address in the forum below.
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Lance Wallach, CLU, ChFC, CIMC, speaks and writes extensively about financial planning, retirement plans, and tax reduction strategies. He is an American Institute of CPA’s course developer and instructor and has authored numerous best selling books about abusive tax shelters, IRS crackdowns and attacks and other tax matters. He speaks at more than 20 national conventions annually and writes for more than 50 national publications. For more information and additional articles on these subjects, visit www.vebaplan.com, www.taxlibrary.us, lawyer4audits.com or call 516-938-5007.
The information provided herein is not intended as legal, accounting, financial or any other type of advice for any specific individual or other entity. You should contact an appropriate professional for any such advice.