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The IRC 409A Trap – Executives Beware!

By now, virtually all employers have addressed compliance with Internal Revenue Code section 409A (‘section 409A’) as it relates to their nonqualified deferred compensation plans, phantom equity plans, stock option plans (for closely held businesses), and stock appreciation rights.  However, it appears that some employers still may not have reviewed their executive employment agreements with respect to compliance with section 409A.

 
As a reminder, failure to comply with section 409A results in expensive tax issues not for the employer but for the executive, including  income tax on any amounts deferred under the agreement retroactive to the first year the agreement violated section 409A, interest on the unpaid taxes, and an excise tax payable by the executive (not payable by the employer) of 20% of the income recognized.

Accordingly, it is imperative that existing employment agreements be reviewed for compliance with section 409A as IRS is actively reviewing executive plans and agreements as part of its corporate audit process.

For more information, please review the article  Beware of Section 409A Traps in Employment Agreements.

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Peter Alwardt is a Tax Partner specializing in employee benefits, tax and ERISA issues for domestic and international clients. He is a member of the American Institute of Certified Public Accountants and NY State Society of CPAs.

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