Deferring Compensation to the next tax year

[Guest CLKeown]

I am a payroll accountant and I have a benefits/tax related issue on which I can find no supporting documentation.

Can any one provide me with ideas of where to research whether or not an Executive may deferred compensation from one tax year to the next?

Our Tax Consultant assures me that this can be done "No problem", yet niether of us can lay our hands on anything in writing.

Any assistane would be appreciated.

CLKeown

[Kirk Maldonado]

In Announcement 87-3, the IRS indicated that short-term deferrals don't work. However, they didn't cite any authority and none exists that supports the IRS position. This was merely a toothless threat.

[This message has been edited by Dave Baker (edited 12-02-1999).]

[Guest CLKeown]

Thanks for the answer.

My problem lies in the fact that our CFO is asking to defer compensation, but my VP of Finance will not let me defer without something in writing that says "You can do this".

I will use your reply for the time being and see what happens. I think I may be caught between the proverbial rock and a hard place on this one.

Thanks again.

CLKeown

[Guest]

The only rule you need is section 61----income is yours once you have the ability to receive it unless you have a qualified plan or a proper non-qualifed deferral election ---a plan and a deferral before the year in which you've earned the salary. You're talking about constructive receipt.

[JWK]

I agree with dsilver. This employee can't simply decide in December 1999 that he wants to receive some of his compensation in 2000. Unless you have a deferral election in place before the tax year in which services are performed, the IRS will assert constructive receipt and taxation in the year in which the comp is earned. There are lots of letter rulings in this area. Also, see section 451 of the Code.

There are many traps for the unwary in setting up a nonqualified deferred compensation plan. Consult with an advisor who knows the tax and ERISA rules applicable to these arrangements.

[This message has been edited by JWK (edited 12-03-1999).]

[Guest CLKeown]

JWK and DSilver -

Thank you for your "plain english" responses. Unfortunately, I am strictly a payroll person and have had little need (until now) to get involved in the benefits arena.

It was great to find such a wealth of knowledge here. It didn't sound kosher to me, but I needed somthing more than a "she said so" to base things on.

Thanks again!

Carole

[Kirk Maldonado]

You need to hire a competent benefits attorney to help you on this matter. I'd recommend doing it soon, because you certainly won't get any discount on fees if you try to find somebody near the end of the money and it in place on or before December 31.

[david rigby]

I think the comments above are accurate but there may be specific circumstances to alter the result.

Suppose on December 1, the employer comes to EES and says,

"We are considering paying some bonuses. If we do so, do you want to receive it this month or next month? Sign here to indicate which you choose."

Would this pass muster on the constructive receipt?

[This message has been edited by pax (edited 12-03-1999).]

[JWK]

That would not pass muster if the choice is solely up to the employee. That's the very essence of the constructive receipt doctrine. The amount is taxable as soon as it's made available without a substantial restriction.