What is Internal Revenue Code (IRC) Section 409A?
IRC Section 409A, added by the American Jobs Creation Act of 2004, is the first comprehensive legislation aimed directly at employer nonqualified deferred compensation (NQDC) plans . If a NQDC plan meets the requirements of Section 409A, plan benefits generally aren’t subject to federal income tax until paid to participants. But, if a NQDC plan fails to meet Section 409A requirements, benefits are subject to tax and penalties as soon as they vest. Caution: Congress left much of Section 409A’s operational details to the IRS. On December 20, 2004, the IRS issued its first guidance, Notice 2005-1 . The Notice is detailed and complex. Many issues aren’t yet addressed, some of the rules provided are temporary, and much more guidance is expected. This article, based on the statute, legislative history, and Notice 2005-1, will be updated as additional guidance is issued. Caution: Section 409A does not replace any other laws or theories of taxation that have previously applied to NQDC plans. E
