White Paper: 409A and 457 Updates That Will Impact Your Deferred Compensation
IRS Proposed Changes Deferred Compensation Rules 2016 409A and 457 Updates
The US Treasury Department and the Internal Revenue Service have issued proposed guidance and new regulations on deferred compensation arrangements under Sections 409A and 457 of the Internal Revenue Code. These actions were published June 22, 2016, in the Federal Register. Follow these links to read, in full, the proposed regulation clarifications and changes that apply to Section 409A and to Section 457.
Since the June 22, 2016, Internal Revenue System announcement of the proposed rules and modifications, numerous articles have been published by reputable sources, offering opinions and interpretations regarding the changes and application of the changes. It is important to note that sources have not been in wholly consistent agreement in interpreting the new guidelines.
The proposed regulations help define what is, and what is not, to be treated as payment of compensation for purposes of Section 409A. Other specific areas in which the new regulations provide helpful insight include, but are not limited to the following:
- The separation of service for employees that move to contractor status, with the specification that when an individual transitions from status as an employee to status as an independent contractor, the determination of “separation from service” is based on employee rules, and if separation does not occur, contractor rules apply in determining whether a separation of service occurs subsequently.
- Timing of post-death payments, with the option for a plan to permit that a payment triggered by the death of a participant or a beneficiary will be made (or will commence) at any time ranging from the date of death to the last day of the year following the year of death.
- Treatment of beneficiaries, including the disability, death, or unforeseeable emergency of the beneficiary, which can serve as a payment event.
- A restriction on the ability to correct Section 409A violations related to non-vested amounts, or to otherwise change terms of payment for non-vested amounts. The new rules will further limit the opportunity to make corrections regarding unvested amounts and adds specific rules defining anti-abuse guidelines.
- The decision to terminate and liquidate rules for one plan necessitates the termination of all plans of the same type maintained within the controlled group.
- Some severance arrangements limited to “two times pay” can be applied to employees who are hired and terminated within the same year.
Continue to follow the Fulcrum Partners News blog for more insights on these proposed modifications or new rules regarding IRS Code 409A and 457 updates.
Download the full report here: White Paper: 409A and 457 Updates