409a And Employee Benefit Plans  

The enactment of section 409A of the IRC (Internal Revenue Code) is part of the Jobs Creation Act of 2004. The enactment of section 409A has excluded numerous benefits and payment arrangements.

Here is a brief list of some of the benefits and payment arrangements excluded from the reach of 409A:

  1. Vacation plans, bona-fide sick leave plans and compensatory time plans are not included.
  2. Certain death or disability benefits provided through insurance
  3. Any benefit provided that are not included in the taxable income under the federal law is excluded form 409A.
  4. Legally permissible payments pursuant to an employer’s indemnification for expenses
  5. Taxable expenses on education paid to employees.
  6. Reimbursement or benefit plan (post-employment)
  7. Also, certain benefits provided after a “separation of service” are excluded from 409A
  8. Amounts connected with reasonable outplacement services to employees.
  9. Taxable repayments for uninsured medical expenses as defined under section 213.
  10. Medical benefits under an insured plan

In the course of drafting regulations interpreting 409A, the Treasury Department and the IRS began with the idea that a no-qualified deferred compensation occurs whenever an employee gets the right to income in a particular year and receives the income in the following year. Based on this basis, the regulation reaches not only conventional deferred compensation, but also arrangements for reimbursement, arrangement for fringe benefits, unemployment benefits and stock awards.

In other words, the 409A impacts nearly every type of deferred compensation arrangement and agreement and failure to comply with these new requirements can result in additional taxes to the employees, including a 20 percent penalty and in some cases, increase in the rate of tax liability itself.

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