Noncompliance With 409A: How Serious an Issue? - 21 July 2009

 

Noncompliance With 409A: How Serious an Issue?

By



Jeff Capwell - McGuireWoods —
July 21, 2009

 

t
the request of subscribers, Compliance Week offers a Remediation
Center, in which readers can submit questions—anonymously—to securities
and accounting experts. Compliance Week’s editors will review all
questions and then submit them—confidentially, of course—to specialists
who can address the issues. The questions and responses will then be
reprinted in a future edition of Compliance Week. Below is one of the
Q&As; ask your own questions by clicking here.

QUESTION

We are a pension administration firm and have a client who signed a
deferred compensation agreement in May 1998; no updates since then, but
there are benefits that have vested since 2004. The legal department of
a major insurance carrier has determined that the agreement and its
documentation are non-compliant with Section 409(a)—the part of the tax
code that governs deferred compensation—and said that the client would
need to contact an attorney or accountant to correct the current
situation before the carrier would issue a policy on the client. We’re
trying to figure out what is involved with correcting the situation.
What’s the next step for the client? Should we self-disclose this to
the IRS? Is this a big mess?

ANSWER

Since your role seems to be limited to providing administrative
services for this deferred compensation arrangement, you generally
would not have an obligation to confirm the insurance company’s
concerns. Instead, you should communicate this concern to the employer
so that the company can engage an experienced tax adviser to provide it
with an independent assessment. If the arrangement is not compliant
with Section 409A, and that non-compliance triggered adverse tax
consequences to the worker, the employer would be required to report
those consequences on a Form W-2 for the affected employee.

Still, you raise the larger question of what to do with
compensation agreements not in compliance with Section 409A. The
deadline to comply with Section 409A was Dec. 31, 2008. If the
agreement (or

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