Section 409A of the Internal Revenue Code requires amounts deferred under a nonqualified deferred compensation plan to be included in gross income to the extent that it is not subject to a substantial risk of forfeiture and not previously included in gross income, unless the plan meets certain requirements.

Guidance provided in Notice 2005-1 in January 2005 required

• employers to report to an employee the total amount of deferrals for the year under a nonqualified deferred compensation plan in box 12 of Form W-2 using code Y.
  
  
• employers to report the amounts deferred in box 1 of Form W-2 as part of the total wages, tips and other compensation paid to the employee during the year, and report such amounts in box 12 of Form W-2 using code Z.
  
  
• payers to report to a non-employee the total amount of deferrals for the year under a nonqualified deferred compensation plan in box 15a of Form 1099-MISC.
  
  
• payers to report the amounts deferred as non-employee compensation in box 7 of Form 1099-MISC, and report such amounts in box 15b of Form 1099-MISC.

In September 2005, the IRS issued proposed regulations regarding the application of § 409A which are proposed to be generally applicable for taxable years beginning on or after January 1, 2007. As stated in the preamble to the proposed regulations, taxpayers may rely on the proposed regulations for periods preceding the effective date of the final regulations.

Consequently, employers' and payers' reporting and wage withholding requirements for calendar year 2005 with respect to deferrals of compensation within the meaning of § 409A are suspended. However, future published guidance may require an employer or payer to file a corrected information return and to furnish a corrected payee statement for calendar year 2005 reporting any previously unreported amounts includible in gross income under § 409A.

Service providers are still required to file a return and pay any taxes due relating to amounts includible in gross income under § 409A for calendar year 2005. However, as service providers are likely to find it difficult to determine the correct amount and timing of inclusions under § 409A without reporting from the employer or payer, the IRS will not assert penalties for calendar year 2005 if the service provider reports and pays any taxes due with respect to such amounts in accordance with future published guidance.

...back to 15 December 2005


Further information:
Suspension of reporting and withholding requirements with respect to deferrals of compensation under § 409A

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