In the case of any specified employee, the requirement of subparagraph A i is met only if distributions may not be made before the date which is 6 months after the date of separation from service or, if earlier, the date of death of the employee.
For purposes of the preceding sentence, a specified employee is a key employee as defined in section i without regard to paragraph 5 thereof of a corporation any stock in which is publicly traded on an established securities market or otherwise.
The requirements of this paragraph are met if the plan does not permit the acceleration of the time or schedule of any payment under the plan , except as provided in regulations by the Secretary. The requirements of this paragraph are met if the requirements of subparagraphs B and C are met. In the case of the first year in which a participant becomes eligible to participate in the plan , such election may be made with respect to services to be performed subsequent to the election within 30 days after the date the participant becomes eligible to participate in such plan.
In the case of any performance-based compensation based on services performed over a period of at least 12 months, such election may be made no later than 6 months before the end of the period. For each taxable year that assets treated as transferred under this subsection remain set aside in a trust or other arrangement subject to paragraph 1 , 2 , or 3 , any increase in value in, or earnings with respect to, such assets shall be treated as an additional transfer of property under this subsection to the extent not previously included in income.
For purposes of subparagraph A , the interest determined under this subparagraph for any taxable year is the amount of interest at the underpayment rate plus 1 percentage point on the underpayments that would have occurred had the amounts so required to be included in gross income by paragraph 1 , 2 , or 3 been includible in gross income for the taxable year in which first deferred or, if later, the first taxable year in which such amounts are not subject to a substantial risk of forfeiture.
Nothing in this section shall be construed to prevent the inclusion of amounts in gross income under any other provision of this chapter or any other rule of law earlier than the time provided in this section. Any amount included in gross income under this section shall not be required to be included in gross income under any other provision of this chapter or any other rule of law later than the time provided in this section.
References to deferred compensation shall be treated as including references to income whether actual or notional attributable to such compensation or such income. Except as provided by the Secretary, rules similar to the rules of subsections b and c of section shall apply.
Section 16 a of the Securities Exchange Act of , referred to in subsec. A prior section A was renumbered section of this title. Former par. Amendment by Pub. Section A and the applicable regulations that have since been implemented under it provide a very complex web of regulation with respect to non-qualified deferred compensation arrangements.
Presumably, IRS Notice , published earlier this year, represents the final opportunity to deal with non-compliant documentation problems in existing arrangements in a manner that avoids, or at least partially avoids in certain circumstances, the dramatically adverse consequences of being taxed under Section A.
Section A impacts certain deferred compensations arrangements between a service provider and the recipient of those services including employees and employers , Section A defines deferred compensation as being any right to payment that arises in a particular tax year, but payment of which is not made until a later year.
There are many arrangements, oral and written, in which A concerns can arise. They include among many others, deferred compensation arrangements, rabbi trusts, employment agreements, severance packages, uninsured disability programs, phantom stock and other phantom equity plans, stock option and other equity option plans, bonus programs including annual bonus plans that pay bonuses earned in one year in the early part of the following year.
Section A thus generates a very hefty tax burden in the event of non-compliance. This burden is increased by the fact that the taxes due are payable at a time when the taxpayer likely has not received any portion of the deferred payment and thus must use other resources to cover the tax. While these tax burdens belong to the service provider generally an employee it is not difficult to recognize that the service provider will look to the service recipient that put the program in place to aid in the resolution of the tax problem.
Further, the service provider is obligated to report noncompliant Section A deferred compensation to the IRS. The result is a tax and morale headache for both parties to the deferral arrangement. These are separation from service, a specified date the participant has chosen, disability, death and change of control.
Fogleman adds that the first, third and fifth have specialized definitions. Amounts can also be paid in an unforeseeable emergency, which he says is like a hardship withdrawal in a qualified retirement plan, but much stricter. Mort and Gaknoki say the time of payment generally may not be accelerated and may not be further postponed except under limited circumstances.
In that case, payment generally must be delayed for a period of six-months from the separation from service or, if earlier, until the death of the employee. Payments may be made in lump-sums or installments. They add that there are three situations when employers can pay out deferrals immediately: When it ceases providing a certain category of NQDC plans altogether and the employer terminates all such plans with respect to all participants; during the 30 days preceding or 12 months following a change in control of a corporation but only if all substantially similar arrangements of the employer are terminated ; and in the case of certain corporate dissolutions or with the approval of a bankruptcy court.
Fogleman says, since employees are the ones who have to pay, this causes concerns about participants suing employers for A failures. According to Mort and Gaknoki, in the event of noncompliance with Section A, the employee will have immediate taxation of the deferred amount in the year the right to the payment vests even if not yet received by the employee.
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