Section 409A of the Internal Revenue Code became law some ten years ago, imposing significant new restrictions on deferred compensation arrangements of all types and significant penalties on employees who participate in arrangements that violate the new rules. Since that date, the Internal Revenue Service (“IRS”) has issued numerous notices, proposed regulations and, ultimately, final regulations. Together, this IRS guidance has clarified the law and provided various opportunities for employers to correct both plan document and operational violations.

The Enforcement Shoe Drops-- The Hunt Begins

It was probably inevitable that the other shoe, the enforcement shoe, would drop some day. That day is here; the hunt for Section 409A violators has begun. The IRS recently announced that is will commence a formal audit program to determine whether employers are complying with the requirements of Section 409A. The program will initially be restricted to approximately 50 large employers and to the ten most highly compensated employees of those companies. The focus of the audits will be on:

  • Initial deferral elections
  • Subsequent deferral elections
  • Distributions of deferred compensation subject to Section 409A

Depending on what the IRS finds in conducting these initial audits, the audit program could be expanded, revised, or, we should be so fortunate, terminated.

What Employers Should Do Now

Whether or not you have already done so, and whether or not you are a potential target of the IRS’s initial Section 409A audit initiative, we recommend that you take the following steps to protect employees from the harsh penalties imposed by Section 409A:

  • Determine what plans, employment agreements, and other arrangements you maintain that are subject to Section 409A (“your 409A Plans”)
  • Review the documentation of all of your 409A Plans to make sure the documents comply with Section 409A
  • Evaluate whether you are complying with Section 409A in operating your 409APlans, paying particular attention to the areas the IRS has indicated it will focus on in its new audit program
  • Take appropriate steps to correct any deficiencies in either the documentation of your 409A Plans or their operation
How Can We Help?

We have a lot of experience in helping all types and sizes of employers address Section 409A issues. If there is anything that we can do to help you make sure you are complying with Section 409A or to correct any deficiencies, we would appreciate being able to do so. Please contact Bill Wright or any other another attorney in our employee benefits practice group if we can be of any assistance.

Womble Carlyle client alerts are intended to provide general information about significant legal developments and should not be construed as legal advice regarding any specific facts and circumstances, nor should they be construed as advertisements for legal services.

IRS Circular 230 Notice: To ensure compliance with requirements imposed by the IRS, we inform you that any US tax advice contained in this communication (or in any attachment) is not intended or written to be used, and cannot be used, for the purpose of (i) avoiding penalties under the Internal Revenue Code or (ii) promoting, marketing or recommending to another party any transaction or matter addressed in this communication (or in any attachment).