New 409A Guidance Announced

The Internal Revenue Service (IRS) has plans to implement new regulations to section 409A of the Internal Revenue Code. These regulations are in regard to the arrangement of deferred compensation. Of the 19 proposed changes, most are minor. However, there are two key changes that businesses should be well informed about.

Payment Following an Employee’s Death

It used to be that upon the death of an employee, distributions were subject to strict timing rules. Distributions had to be made by the end of the year in which the employee passed away. In cases where the death occurred at the end of the calendar year, dispersals had to be made within two and a half months of the employee’s death. These requirements were hard to abide by for employers due to delays in being informed of the employee’s death, as well as because of the time needed to identify the beneficiary of the employee.

The new regulations state that distributions can be made after the death at any time until December 31 of the year following the year the employee passes away. The proposed regulations also include an anti-abuse rule that applies to employers who show a pattern of using these regulations to change payments or the timeliness of the payments.

Limitations on Correcting Document Errors

Currently, corrections to non-compliant deferred compensation documents are typically permitted as long as they are done prior to the year in which the risk of forfeiting passes. However, the new rules place some limitations on the correction process for these forms. The most important of these limitations is the one placed on the ability to restrict the alterations of a time or form of payment. Essentially, when it is reasonable to believe the original provision met 409A requirements, alterations will not be permitted. Such corrections will not be restricted when there is a “reasonable, good faith basis” that the condition was not allowed under 409A, and thus the correction is essential to ensure section 409A is abided by.

The Treasury Department has requested that the effective date of the new regulations be September 20, 2016. Although the changes won’t go into effect for another month, it is advisable to treat them as such since what is proposed merely serves to clarify the existing language of the 409A rules. If you need help understanding the new regulations, contact a West Palm Beach business attorney for the expertise you need to comply with section 409A.