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Guest Article

Deloitte logo

(From the December 15, 2008 issue of Deloitte's Washington Bulletin, a periodic update of legal and regulatory developments relating to Employee Benefits.)

Reporting and Wage Withholding under Section 409A


On December 10, 2008, the IRS released Notice 2008-115, interim guidance concerning the reporting and wage holding requirements for nonqualified deferred compensation under IRC § 409A. The notice provides the reporting requirements for employers and other payers with respect to all deferrals of compensation, and employees' income tax reporting and tax payment requirements under IRC § 409A. It is effective for calendar year 2008 and will remain in effect for subsequent calendar years until the Treasury Department and the IRS issue further guidance.

Employer Reporting and Wage Withholding Provisions

Annual Deferrals -- Amounts Reportable on Form W-2 or Form 1099-MISC

For employers, code Y reporting in box 12 of Form W-2 is not required for 2008 or any future year until future notice. Likewise, a payer is not required to report deferred amounts in box 15a of Form 1099- MISC.

Reporting and Withholding -- Amounts Includible in Gross Income under IRC § 409A

Amounts includible in gross income under IRC § 409A are supplemental wages for purposes of determining the amount of income tax required to be deducted and withheld under IRC § 3402(a), regardless of whether the employer has paid the employee any regular wages during the calendar year of the payment. The amount required to be withheld is not increased on account of the additional income taxes imposed under IRC § 409A(a)(1)(B). Employees should thus be aware that estimated tax payments may be required to avoid penalties under IRC § 6654.

For nonemployees, IRC § 6041(g)(2) requires a payer to report to a nonemployee any amount that is includible in gross income under IRC § 409A that is not treated as wages under IRC § 3401(a). Thus, a payer must report amounts includible in gross income under IRC § 409A and not treated as wages under IRC § 3401(a) as nonemployee compensation in box 7 of Form 1099-MISC. A payer must also report such amounts as IRC § 409A income in box 15b of Form 1099-MISC. Nonemployees should be aware that estimated tax payments may be required to avoid penalties under IRC § 6654.

Calculation of Amounts Includible in Income under IRC § 409A(a) -- In General

In general, the amount includible in gross income under IRC § 409A(a) and required to be reported by the employer equals the portion of the total amount deferred under the plan that, as of December 31 of the applicable calendar year, is not subject to a substantial risk of forfeiture, and has not been included in income in a previous year, plus any amounts of deferred compensation paid or made available to the service provider under the plan during the applicable calendar year

Wage Payment Date of Amounts Includible in Income under IRC § 409A(a)

Amounts includible in gross income under IRC § 409A(a) that are either actually or constructively received (disregarding the application of IRC § 409A) by an employee are considered a payment of wages by the employer when actually or constructively received by the employee.

If amounts are neither actually nor constructively received by the employee during the applicable calendar year, they are treated as a payment of wages on December 31 of that calendar year.

If the employer does not withhold income tax, or withholds less than the correct amount, the employee will receive credit under IRC § 31 for that calendar year if the employer follows one of two possible options:

  1. Withhold or recover from the employee the amount of the undercollection after December 31 of the applicable calendar year and before February 1 of the subsequent calendar year, and report such amounts as wages for the quarter ending December 31 of the applicable calendar year on Form 941 for that quarter and in box 1 of the employee's Form W-2; or
  2. Pay the income tax withholding liability on behalf of the employee (without deduction from the employee's wages or other reimbursement by the employee), and report the gross amount of wages and the income tax withholding liability for the quarter ending December 31 of the applicable calendar year.

No penalties for failure to deposit taxes under IRC § 6656 will be imposed if the income tax withholding liability on such wages is paid to the IRS by January 31 of the subsequent year for the quarter ending December 31 of the applicable calendar year.

Amounts Includible in Income under IRC § 409A(a)

The Notice provides the following guidance with respect to particular types of nonqualified deferred compensation arrangements. In each case, as noted above, the amount includible in income is limited to amount no longer subject to a substantial risk of forfeiture.

  • Account Balance Plans - The amount deferred as of December 31 of a calendar year equals the amount that would be treated as an amount deferred under IRC § 31.3121(v)(2)-1(c)(1) on December 31 of that calendar year if the entire account balance were treated as a principal amount credited to the service provider's account on December 31 of that calendar year. These same calculation rules apply to a nonemployee participating in an account balance plan.
  • Nonaccount Balance Plans (Reasonably Ascertainable Amounts) - The amount deferred as of December 31 of a calendar year equals the present value of all future payments to which the service provider has obtained a legally binding right as of December 31 of that calendar year, calculated in accordance with IRC § 31.3121(v)(2)-1(c)(2) as if the service provider had obtained all of such rights on December 31 of that calendar year.
  • Amounts Deferred Under Stock Rights Covered by IRC § 409A - The amount deferred as of December 31 of a calendar year equals the amount that the service provider would be required to include in income if the stock rights were immediately exercisable and exercised on December 31 of that calendar year.
  • Other Deferred Amounts - The amount deferred as of December 31 of a calendar year must be determined under a reasonable, good faith application of a reasonable, good faith method. Generally, the use of an assumption with respect to a contingency that results in the amount deferred being the lowest potential value of the future payment will be presumed not to be a reasonable, good faith assumption unless clear and convincing evidence demonstrates that the assumption is reasonable.

Amounts Includible in Income under IRC § 409A(b)

Notice 2006-33 relief is not extended beyond December 31, 2007. Amounts includible in income under IRC § 409A(b) that are not eligible for the relief in Notice 2006-33 are treated as wages paid on the date the deemed transfer of property under IRC § 83 described in IRC § 409A(b) would be required to be included in income under the rules of IRC § 83, for purposes of withholding, depositing and reporting the income tax at source on wages under IRC § 3401(a). (For amounts includible in income under IRC § 409A(b) that were eligible for the relief in Notice 2006-33 ("grace period assets") but are includible in income under IRC § 409A(b) because the arrangement is not made compliant with IRC § 409A(b) on or before December 31, 2007, section VI of Notice 2007-78 provides that the date of the deemed transfer of property is January 1, 2008.)

Protection from Future Additional Reporting or Withholding

An employer who complies with this notice will not be liable for additional income tax withholding or penalties, or be required to file a subsequent corrected information return or furnish a corrected payee statement, as a result of future published guidance with respect to the calculation of amounts includible in gross income under IRC § 409A.

Service Provider Requirements with respect to Amounts Includible in Gross Income under IRC § 409A

Amounts Required to be Included in Income

The same standards apply to a service provider as apply to an employer when calculating the amount required to be reported as income under IRC § 409A, provided that an amount is treated as previously included in income only if the amount has been included in the service provider's income in a previous taxable year (regardless of whether reported on a Form W-2 or Form 1099-MISC).

Whether a service provider has complied with the requirements of this notice is determined independently of whether the employer has complied with the requirements of this notice. Thus, the IRS may assert additional income taxes and penalties under IRC §IRC § 6651(a)(1) and (2), 6654, and 6662 if it is determined that the amount of taxes reported and paid for calendar year 2008 was underreported or underpaid.

Calculation of Additional Tax under IRC§§409A(a)(1)(B)(i)(I)

For purposes of the calculation of the additional tax, taxpayers may treat amounts deferred under a plan that were originally deferred on or before January 1, 2005, but became subject to IRC § 409A due to the material modification of the plan after October 3, 2004, as deferred on January 1, 2005.

Reliance on the Proposed Regulations

Until the Treasury Department and the IRS issue further guidance, compliance with the provisions of the proposed regulations with respect to the calculation of the amount includible in income under IRC § 409A(a) and the calculation of the additional taxes under IRC § 409A will be treated as compliance with the requirements of this notice.


Deloitte logoThe information in this Washington Bulletin is general in nature only and not intended to provide advice or guidance for specific situations.

If you have any questions or need additional information about articles appearing in this or previous versions of Washington Bulletin, please contact: Robert Davis 202.879.3094, Elizabeth Drigotas 202.879.4985, Mary Jones 202.378.5067, Stephen LaGarde 202.879-5608, Erinn Madden 202.572.7677, Bart Massey 202.220.2104, Mark Neilio 202.378.5046, Tom Pevarnik 202.879.5314, Sandra Rolitsky 202.220.2025, Tom Veal 312.946.2595 Deborah Walker 202.879.4955.

Copyright 2008, Deloitte.


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