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Beware Upcoming 409A Audits

The IRS recently announced that it is rolling out a formal compliance initiative examining selected employers and their deferred compensation arrangements that are subject to Code Section 409A of the Internal Revenue Code.  As many of you know, Code Section 409A applies to non-qualified deferred compensation arrangements and contains very specific and complicated rules relating to the ability of an employer, employee, or other service provider to defer the receipt of certain compensation to later tax years.  Compensation that is deferred and not documented or operated in a manner that is consistent with the rules of Code Section 409A will be immediately included in the employee’s income, even where the amount has not actually been paid to the employee, and the amount will also be subject to an additional 20% tax and penalty interest.  In light of this recent announcement, we are encouraging all of our clients to review their deferred compensation arrangements to ensure compliance with the complex rules contained in Code Section 409A.