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TAX ALERT
YEAR END TAX REMINDER
NON-QUALIFIED DEFERRED COMPENSATION PLANS
Dear Clients and Friends of the Firm:
The Internal Revenue Service recently issued regulations regarding the tax treatment of non-qualified deferred compensation plans (Section 409A of the Internal Revenue Code). Certain actions must be taken before year end.
- Please identify any non-qualified deferred compensation plans which you may have entered into. These include voluntary deferral arrangements, employer provided deferred compensation plans, equity compensation plans including stock options, stock appreciation rights, phantom stock plans, deferral of compensation under employment and consulting agreements, severance pay plans, change in control plans and long-term and short-term incentive plans. The new regulations do not apply to qualified retirement plans, e.g., defined benefit, profit sharing, 401(k) plans, etc. The plans should be reviewed to determine if any changes are required in order to conform with the new rules. Most plans will be affected by the time of deferral requirements and distribution requirements.
- Actions which are or may be needed before December 31, 2005 include:
a) Participants who wish to defer compensation that will be earned in 2006 must make their deferral election no later than December 31, 2005.
b) Until December 31, 2005, employers may terminate any non-qualified deferred compensation plan and distribute the amounts deferred (without being subject to the new rules), provided any vested deferred compensation that is distributed is included in 2005 income.
c) In addition, the rules provide that distributions from non-qualified plans can only be made upon certain events, namely separation from service, death, disability, specified time, change in control or an unforeseeable emergency. Acceleration of distributions or any other event is prohibited.
If the new rules are not followed, amounts deferred will generally be taxable immediately and subject to a 20% penalty tax.
If you have any questions, please feel free to contact Avery Neumark, Partner-in-Charge of Employee Benefits and Executive Compensation at 212-303-1806 or Alan Willinger, Tax Partner at 212-303-1011.
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For information contact:
Alisa Morris
Director of Marketing
(212) 303-1880
amorris@rssmcpa.com
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