409A reporting/withholding requirements

[Guest jigpsu100]

I've determined that a stock option plan is subject to 409A and will be subject to the additional 20% tax. Does it have to be reported to the IRS? When does it have to be reported? Also, are there reporting requirements for the employer? Notice 2005-1 covers these topics but I'm having a hard time interpreting them and applying them to an actual situation. Any help would be appreciated.

[E as in ERISA]

The IRS says it will issue some additional guidance on completing the W-2.

[mbozek]

See instructions for box 12 on W-2. Codes Y and Z will be used for payments from NQDC. 20% tax is not reported on w-2 because it is paid on ee tax return for 05.

[cripp12]

I am not an expert but I was wondering if someone can explain what could happen. I was told that all earnings will need to be reportable but not taxable. How does this affect the employee? Anything will help me in order for me to get out my 2006 enrollment packets.

[mbozek]

I dont understand what our are asking. If the amounts paid are wages they must be reported and income taxes/FICA/medicare withheld.The employee will be responsible for paying the 20% penalty tax and the tax on imputed income when the 1040 is filed. Have you looked at the instructions for codes Y and Z on box 12 of the W-2?

[cripp12]

I am speaking about the employees who do not take a distribution. Is the 20% penalty tax part of the new provision?

[mbozek]

The 20% tax will be assessed on a NQDC plan that does not meet the statutory requirements of 409A or is not operated in accordance with its provisions. You need to review the applicable regulations to determine application to persons who do not take a distribution. You need to check the instructions for box 12 of the w-2 to see what must be reported.

[cripp12]

Thanks mobozek,

Your refering to the 258 page document aren't you? Can I check the IRS site for the instructions for box 12 of the w-2. Thanks Again

[cripp12]

Here is an email I received from our trustee. The earnings reportable could be a problem to retrieve.

"Nonqualified deferred compensation plans. New section 409A, added by the American Jobs Creation Act of 2004, provides that all amounts deferred under a nonqualified deferred compensation (NQDC) plan for all tax years are currently includible in gross income unless certain requirements are met. If section 409A requires an amount to be included in gross income, the section imposes a substantial additional tax. Section 409A, generally, is effective with respect to amounts deferred in tax years beginning after December 31, 2004, but deferrals made prior to that year may be subject to section 409A under some circumstances.

The Act requires reporting of the yearly deferrals (plus earnings) under a section 409A nonqualified deferred compensation plan, using Code Y in box 12.

Income included under section 409A from a nonqualified deferred compensation plan will be reported in box 1, and in box 12 using Code Z. This income is also subject to an additional tax reported on Form 1040. "

[mbozek]

I dont know what you aer asking. The 20% tax will be imposed if the post 04 deferrals and income do not comply with the provisions of 409A.

[cripp12]

I understand now. Our plan is in compliance so all we need to worry about is reporting the deferrals and the income on those deferrals on the w-2. Thanks