409A Applicable Law - From Code to Regs to IRS Notices
(look below this table for new developments)
Reporting and Withholding Rules:
Primers about 409A Generally:
Other 409A Topics:
409A Developments (see "Severance" separately below):
2019.07.10 Messed up Election - Employer Escapes Immediate Liability (Sixth Circuit Decision). In Wilson v. Safelite Group, Inc., the employer succeed in dismissing state law claims, because its deferred compensation plan constituted an ERISA pension plan. The case arose from an IRS audit that levied substantial penalties on a former CEO's $9.1 million account, due to deferral election failures under Section 409A. Employers should check their plans, employment agreement agreements, and any agreements involving deferred compensation - in order to assure that they close the door to tax claims based on stumbles relating to Section 409A, as well as federal tax withholding (taking into account the Henkel decision).
2016.06.22 409A Proposed Regs Released - Many Clarifications. The IRS release begins with a list of 19 clarifications being made, with a few of the notable changes being described in the following quotations from the IRS proposal:
2015.Sept.20 Section 409A Corrections to Employment Agreements - Time for an Ounce of Protection in The Year BEFORE Vesting (or Severance)
First the bad news: when it comes to 409A violations, the most common sources are employment agreements and releases. With surprising frequency, employers encounter 409A problems due to conditions timing severance pay to an employee's execution of a claims release. Other common sources for 409A problems arise from allowing employees to choose between receiving their severance in lump sums or installments, or receiving cash-outs of employer-paid COBRA coverage.
Now the good news: a 2015 IRS Chief Council Memo supports the correction of defective severance provisions if that occurs in the year before a termination of employment occurs. The IRS memo was actually unfavorable to the taxpayer, because it rejected a 409A correction that took place in the year severance occurred. While time remains this year, it is worth reviewing any agreements, plans, or releases that provide for severance. For a helpful diagnostic aid, see this 409A compliance checklist focused employment agreements.
2013.Nov.23 "Legally binding Rights" Tax Ruling for Bonus Deductions . . . 409A? In Field Attorney Advice dated 10/25/13, the IRS cites extensive authority for its position that legally binding rights do not exist when an employer has reserved to itself the unilateral right to reduce or eliminate bonus awards prior to making payments. While focused on when tax deductions are allowable, the memo has interesting implications under Code §409A because Treas. Reg. §1.409A-1(b)(1) provides that legally binding rights may arise -- despite an employer's reservation of rights to reduce awards -- if facts and circumstances indicate that those rights "lack substantive significance." In the absence of employer actions undermining its discretion to reduce or eliminate bonuses or other awards, the IRS Field Attorney Advice Memo is significant because it provides solid authority on which to argue that an employer's reservation of rights makes Code §409A totally inapplicable.
2013.Mar.06 Over $5 Million of Option Gain subject to 409A Penalties due to Below-Market Option Price. In Sutardja v U.S., the Court of Federal Claims refused a taxpayer's summary judgment motion seeking a refund of 409A penalties paid with respect to more than $5 million of income arising from the taxpayer's exercise of stock options in 2006. The court rejected arguments to the effect that 409A cannot apply to stock options, and in the process held that Notice 2005-1 provided a reasonable basis for the imposition of 409A taxes if the exercise price for the stock options is ultimately found to have been below the fair market value of the underlying shares on the grant date.
Severance from Employment
Release Requirements and Timing of Payments
Substantial Risk of Forfeiture
Substitutions - of New Benefits for 409A Benefits
Termination (of Plan)
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