Blogging Employee Benefits

March 21, 2006

Transition Relief for IRC §409A(b)

Filed under: 409A, IRS — Fuguerre @ 3:24 pm

Taxpayers have through 12/31/2007 to bring nonqualified deferred compensation plans into compliance with respect to rules under IRC §409A(b) relating to offshore trusts and financial health triggers, under transition relief announced by the IRS. [IRS Notice 2006-33]

IRC §409A(b) requires income inclusion and additional taxation if an offshore trust is used in conjunction with a nonqualified deferred compensation plan or if assets become restricted upon a change in the employer’s financial health. The Gulf Opportunity Zone Act of 2005 (GOZA) §403(hh) clarified the effective date for IRC §409A(b) to be 1/1/2005, including amounts relating to compensation deferrals earned and vested on or before 12/31/2004. As further directed by GOZA, the IRS has provided a limited transition period for plans to come into compliance with §409A(b) —

  • Definition of Nonqualified Deferred Compensation – The definitions under 409A(a) apply for purposes of compliance with 409A(b).
  • Grace Period Assets – With respect to the provisions of §409A(b), “grace period assets” are assets set aside, transferred, or restricted on or before 3/21/2006, including actual earnings credited on such assets after 3/21/2006. Subsequent setting aside, transfer, or restriction of such assets will not be eligible for the transition relief.
  • Compliance Transition Relief – With respect to grace period assets, the income inclusion and additional taxation provisions of IRC §409A(b) will not be triggered if the plan comes into compliance on or before 12/31/2007.
  • Pre-2008 Payments – Payment of nonqualified deferred compensation through 12/31/2007 will be treated as having first been made from grace period assets. Payments included in income before 2008 will be treated as having complied with 409A(b) for pre-payment periods.
  • Pre-2008 Disassociation – If grace period assets are no longer associated with payment of nonqualified deferred compensation on or before 12/31/2007 (for instance, through dissolution of a trust), then the plan is treated as having complied with 409A(b) through the date of the disassociation.
  • Good Faith Compliance – Until further guidance has been published by the IRS, taxpayers may rely on reasonable, good faith interpretation of IRC §409A(b).
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