IRAs and Nonqualified Compensation Plans

Can an erroneous Form 1099 save you from tax and penalties?

It’s an oddball question, methinks. I anticipate the other side of that see-saw is whether one knew, or should have known, better.

Let’s look at the Clair Couturier case.

Clair is a man, by the way. His wife’s is named Vicki.

Clair used to be the president of Noll Manufacturing (Noll).

Clair and Noll had varieties of deferred compensation going on: 

(1)   He owned shares in the company employee stock ownership program (ESOP).

(2)   He had a deferred compensation arrangement (his “Compensation Continuation Agreement”) wherein he would receive monthly payments of $30 grand when he retired.

(3)   He participated in an incentive stock option plan.

(4)   He also participated in another that sounds like a phantom stock arrangement or its cousin. The plan flavor doesn’t matter; no matter what flavor you select Clair is being served nonqualified deferred compensation in a cone.

Sounds to me like Noll was taking care of Clair.

There was a corporate reorganization in 2004.

Someone wanted Clair out.

COMMENT: Let’s talk about an ESOP briefly, as it is germane to what happened here. AN ESOP is a retirement plan. Think of it as 401(k), except that you own stock in the company sponsoring the ESOP and not mutual funds at Fidelity or Vanguard. In this case, Noll sponsored the ESOP, so the ESOP would own Noll stock. How much Noll stock would it own? It can vary. It doesn’t have to be 100%, but it might be. Let’s say that it was 100% for this conversation. In that case, Clair would not own any Noll stock directly, but he would own a ton of stock indirectly through the ESOP.

If someone wanted him out, they would have to buy him out through the ESOP.

Somebody bought out Clair for $26 million.

COMMENT: I wish.

The ESOP sent Clair a Form 1099 reporting a distribution of $26 million. The 1099 indicated that he rolled-over this amount to an IRA.

Clair reported the roll-over on his 2004 tax return. It was just reporting; there is no tax on a roll-over unless someone blows it.

QUESTION: Did someone blow it?

Let’s go back. Clair had four pieces to his deferred compensation, of which the ESOP was but one. What happened to the other three?

Well, I suppose the deal might have been altered. Maybe Clair forfeited the other three. If you pay me enough, I will go away.

Problem:

         § 409 Qualifications for tax credit employee stock ownership plans

So?

        (p)  Prohibited allocations of securities in an S corporation

                      (4)  Disqualified person

Clair was a disqualified person to the ESOP. He couldn’t just make-up whatever deal he wanted. Well, technically he could, but the government reserved the right to drop the hammer.

The government dropped the hammer.

The Department of Labor got involved. The DOL referred the case to the IRS Employee Plan Division. The IRS was looking for prohibited transactions.

Found something close enough.

Clair was paid $26 million for his stock.

The IRS determined that the stock was worth less than a million.

QUESTION: What about that 1099 for the rollover?

ANSWER: You mean the 1099 that apparently was never sent to the IRS?

What was the remaining $25 million about?

It was about those three nonqualified compensation plans.

Oh, oh.

This is going to cost.

Why?

Because only funds in a qualified plan can be rolled to an IRA.

Funds in a nonqualified plan cannot.

Clair rolled $26 million. He should have rolled less than a million.

Wait. In what year did the IRS drop the hammer?

In 2016.

Wasn’t that outside the three-year window for auditing Clair’s return?

Yep.

So Clair was scot-free?

Nope.

The IRS could not adjust Clair’s income tax for 2004. It could however tag him with a penalty for overfunding his IRA by $25 million.

Potato, poetawtoe. Both would clock out under the statute of limitations, right?

Nope.

There is an excise tax (normal folk call it a “penalty”) in the Code for overfunding an IRA. The tax is 6 percent. That doesn’t sound so bad, until you realize that the tax is 6 percent per year until you take the excess contribution out of the IRA.

Clair never took anything out of his IRA.

This thing has been compounding at 6 percent per year for … how many years?

The IRS wanted around $8.5 million.

The Tax Court agreed.

Clair owed.

Big.

Our case this time was Couturier v Commissioner, T.C. Memo 2022-69.

FICA Tax On Nonqualified Deferred Compensation

 

One of the accountants brought me what she considered an unusual W-2.

Using accounting slang, Form W-2 box 1 income is the number you include on your income tax return. Box 3 income is the amount on which you paid social security tax.  There often is a difference. A common reason is a 401(k) deferral – you pay social security tax but not income tax on the 401(k) contribution.

She had seen fact pattern that a thousand times. What caught her eye was that the difference between box 1 and box 3 income was much too large to just be a 401(k). 

Enter the world of nonqualified deferred compensation.

What is it?

Let’s analyze the term backwards:

·      It is compensation, meaning that there is (or was) an employment relationship.

·      There is a lag in the payment. It might be that the employee wants the lag; it might be that the employer wants the lag. A common example of the latter is a handcuff: the employee gets a bonus for remaining with the company a while.

·       The arrangement does not meet the requirements of standardized deferred compensation plans, such as a profit-sharing or 401(k) plan. You have one of those and tax Code requires to you include certain things and exclude others. That standardization is what makes the plan “qualified.”

A common type of nonqual (yep, that is what we call it) is a SERP – supplemental executive retirement plan. Get to be a big cheese at a big company (think Proctor & Gamble or FedEx) and you probably have a SERP as part of your compensation package.

I wish I had those problems. Not a big company. Not a big cheese.

Let’s give our mister big cheese a name: Gouda.

Gouda has a nonqual.

The taxation of a nonqual is a bit nonintuitive: the FICA taxation does not necessarily coincide with its income taxation.

Let’s run through an example. Gouda has a SERP. It vests at one point in time- say 5 years from now. It will not however be paid until Gouda retires or otherwise separates from service.

Unless something goes horribly wrong. Gouda does not have income tax until he receives the money. That might be 5 years from now or it might be 20 years.

Makes sense.

The FICA tax is based on a different trigger: when does Gouda have a right to the money?

Think of it like this: when can Gouda sue if the company fails to pay him? That is the moment Gouda “vests” in the SERP. He has a right to the money and – barring the exceptional – he cannot be stripped of this right.

In our example, Gouda vests in 5 years.

Gouda will pay social security and Medicare (that is, FICA) tax in 5 years.

It is what sets up the weird-looking Form W-2. Let’s say the deferred compensation is $100 grand. The accountant is looking at a W-2 where box 3 income is (at least) $100 grand higher than box 1 income (remember: box 1 is income tax and Gouda will not pay income tax until gets the money).

There is even a name for this accounting: the “Special Timing Rule.”

Why does this rule exist?

You know why: the government wants its money - at least some of it.

But if you think about it, the special timing rule can be beneficial to the employee. Say that Gouda is drawing a nice paycheck: $400 grand. The social security wage base for 2020 is $137,700. Gouda is way past paying the full-boat 7.65% FICA tax. He is paying only the Medicare portion of the FICA - which is 1.45%. If the IRS waited until he retired, odds are the Gouda would not be working and would therefore have to pay the full-boat 7.65% (up to the wage limit, whatever that amount is at the time).

Can Gouda get stiffed by the special timing rule?

Oh yes.

Let’s look at the Koopman v United States case.

Mr Koopman retired from United Airlines in 2001. He paid FICA tax (pursuant to the special timing rule) on approximately $415 grand.

In 2002 United Airlines filed for bankruptcy.

It took a few years to shake out, but Mr Koopman finally received approximately $248 grand of what United had promised him.

This being a tax blog, you know there is a tax hook somewhere in there.

Mr Koopman wanted the excess FICA he had paid. He paid FICA on $415 grand but received only $248 grand.

In 2007 Koopman filed a refund claim for that excess FICA.

Does he have a chance?

Mr Koopman lost, but he did not lose because of the general rule or special rule or any of that. He lost for the most basic of tax reasons: one only has 3 years (usually) to amend a return and request a refund. He filed his refund request in 2007 – much more than 3 years after his withholdings in 2001.

Is there something Koopman could have done?

Yes, but he still could not wait until 2007. He would have had to do it by 2004 – the magic three years.

What could he have done?

File a protective refund claim.

I do not believe we have talked before about protective claims. It is a specialized technique, and an accountant can go a career and never file one.

I believe we have a near-future blog topic here. Let me see if I can find a case involving protective claims that you might want to read and I would want to write.

No Soup For You!

“No soup for you!”

The reference of course is to the soup Nazi in the Seinfield television series. His name is Al Yegeneh. You can still buy his soup should you find yourself in New York or New Jersey.

However, it is not Al who we are interested in.

We instead are interested in Robert Bertrand, the CEO of Soupman, Inc, a company that licenses Al’s likeness and recipes. Think franchise and you are on the right track.

Bertrand however has drawn the ire of the IRS. He has been charged with disbursing approximately $3 million of unreported payroll, in the form of cash and stock.

The IRS says that $3 million of payroll is about $600,000 of unpaid federal payroll taxes.    

Payroll taxes – as we have discussed before – have some of the nastiest penalties going.

And that is just for paying the taxes late.

Do not pay the taxes – as Bertrand is charged – and the problem only escalates. He faces up to five years in prison. His daughter co-signed a $50,000 bond so he could get out of jail.

BTW the judge also ordered him to hire an attorney.

COMMENT: I don’t get it either. One of the first things I would have done was to hire a tax attorney.

I have not been able to discover which flavor of stock-as-compensation Soupman, Inc used, although I have a guess.

My guess is that Soupman Inc used nonqualified stock options.

COMMENT: There are multiple ways to incorporate stock into a compensation package. Nonqualified options (“nonquals” or “NSO’s”) are one, but qualified stock options (“ISO’s”) or restricted stock awards (“RSA’s”) are also available. Today we are talking only about nonquals.

Using nonquals, Soupman Inc would not grant stock immediately. The options would have a delay – such as requiring one to work there for a certain number of years before being able to exercise the option. Then there is the matter of price: will the option exercise for stock value at the time (not much of an incentive, if you ask me) or at some reduced price (zero, for example, would be a great incentive).

Let’s use some numbers to understand how nonquals work.

• Let’s start with a great key employee that we are very interested in retaining. We will call him Steve.
• Let’s grant Steve nonqualified options for 50,000 shares. Steve can buy stock at $10/share. As the stock is presently selling at $20/share, this is a good deal for Steve.
• But Steve cannot buy the stock right now. No, no, he has to wait at least 4 years, then he has six years after that to exercise. He can exercise once a year, after which he has to wait until next year. He can exercise as much of the stock as he likes, up to the 50,000-share maximum.
• There is a serious tax trap in here that we need to avoid, and it has to do with Steve having unfettered discretion over the option. For example, we cannot allow Steve to borrow against the option or allow him to sell the option to another person. The IRS could then argue that Steve is so close to actually having cash that he is taxable – right now. That would be bad.

Let’s fast forward six years and Steve exercises the option in full. The stock is worth $110 per share.

Steve has federal income tax withholding.

Steve has FICA withholding.

Steve has state tax withholding.

Where is the cash coming from for all this withholding?

The easiest solution is if Steve is still getting a regular paycheck. The employer would dip into that paycheck to take out all the withholdings on the option exercise.

OBSERVATION: Another way would be for Steve to sell enough stock to cover his withholdings. The nerd term for this is “cashless.”

It may be that the withholdings are so large they would swamp Steve’s regular paycheck. Maybe Steve writes a check to cover the withholdings.

COMMENT: If I know Steve, he is retiring when the checks clear.

Steve has income. It will show up on his W-2. He will include that option exercise (via his W-2) on his tax return for the year. The government got its vig.

How about the employer?

Steve’s employer has a tax deduction equal to the income included on Steve’s W-2.

The employer also has employer payroll taxes, such as:

·      Employer FICA

·      Federal unemployment

·      State unemployment

Let’s be honest, the employer payroll taxes are a drop in the bucket compared to Steve’s income from exercising the option.

Why would Steve’s employer do this?

There are two reasons. One is obvious; the second perhaps not as much.

One reason is that the employer wants to hold onto Steve. The stock option serves as a handcuff. There is enough there to entice Steve to stay, at least for a few years.

The second is that the employer manufactured a tax deduction almost out of thin air.

Huh?

How many shares did Steve exercise?

50,000.

What was the bargain element in the option exercise?

$110 - $10 = $100. Times 50,000 shares is $5,000,000 to Steve.

How much cash did the employer part with to pay Steve?

Whatever the employer FICA, federal and state unemployment taxes are – undoubtedly a lot less than $5,000,000.

Tax loophole! How Congress allow this? Unfair! Canadian football!

I disagree.

Why?

To my way of thinking, Steve is paying taxes on $5,000,000, so it is only fair that his employer gets to deduct the same $5,000,000. To argue otherwise is to wander into the-sound-of-one-hand-clapping territory.    

But, but … the employer did not actually pay $5,000,000.
   

COMMENT: Sometimes the numbers go exponential. Mark Zuckerberg, for example, had options to purchase 120 million shares for just 6 cents per share when Facebook went public at $38 per share. The “but, but …” crowd would want to see a $4,550,000,000 check.

I admit: so would I. I would frame the check. After I cashed it. It would also be my Christmas card every year.

You are starting to understand why Silicon Valley start-up companies like nonqualified stock options. Their cost right now is nada, but it can be a very nice tax deduction down the road when the company hits it big.

I suspect that Soupman, Inc did something like the above.

They just forgot to send in Steve’s withholdings.

Suboptimal Tax Laws Are Still Valid Tax Laws

I have a family member who has accepted in position in, and will be moving to, Chicago. You can bet that we have discussed the compensation package, and I am to review the deferred compensation package when provided. His is a “C suite” position, so deferred compensation means more than just the 401(k) with which you and I are familiar.

I find myself reviewing a Federal Court of Claims decision on an airline pilot that got on the wrong side of FICA taxation of deferred compensation.

His name is Louis Balestra, and he was a pilot with United Airlines from 1979 until his retirement in 2004. There may have been no tax case, except that United Airlines filed for bankruptcy in 2002.

Let’s talk about the “general timing rule” for FICA taxation. It is easy: you pay FICA when you are paid. No pay, no tax. No fair to not cash your paycheck!

We also have deferred compensation, more specifically “nonqualified” deferred compensation, which means a retirement plan which deviates, either a little or a lot, from somewhat rigid IRS requirements in order to be “qualified.” There is then a ‘special timing rule” (I am not making this up, I swear), the purpose of which is to speed-up when the income is taxed for FICA. The Code section is 3121(v)(2):

   3121(v)(2) TREATMENT OF CERTAIN NONQUALIFIED DEFERRED COMPENSATION PLANS.—

3121(v)(2)(A) IN GENERAL.— Any amount deferred under a nonqualified deferred compensation plan shall be taken into account for purposes of this chapter as of the later of—

3121(v)(2)(A)(i)   when the services are performed, or

3121(v)(2)(A)(ii)   when there is no substantial risk of forfeiture of the rights to such amount.

We have a new shiny: “substantial risk of forfeiture.” If the company funds your benefit, for example, chances are that your FICA tax will be accelerated, perhaps many years before you actually receive any money.

Let’s work through this with an extremely simplified example. The company agrees to pay you $100,000 five years from now. Let’s also posit that you clear the second requirement of “no substantial risk of forfeiture.” Congratulations, you have FICA tax. Right now.

Being a tax accountant by training if not by temperament, I have to ask the question: how do I calculate the income to be taxed? Is it $100,000? That doesn’t make sense, as you will receive the money five years from now. A hundred grand then is not the same as a hundred grand now, if for no other reason than you could put it n a CD (if you received it now) and have more than a hundred grand five years hence. Is it the present value of the $100,000, discounted at some interest rate and for five years? That makes more sense, and that is the guidance provided by the Regulations.

Remember what I said about United Airlines filing for bankruptcy in 2002, two years before Balestra retired? Shouldn’t we take into consideration that United Airlines might not pay everything to which Balestra is entitled?

Makes sense to me. For example, Balestra paid FICA on approximately $289,000 of deferred compensation. United actually paid him approximately $63,000. He had paid FICA on that entire $289,000, and he wanted some of it back.

CLARIFICATION: It would be more correct to say that he paid the Medicare portion of FICA, as the social security side only applies up to an income limit.  Let’s continue. We are on a roll.

Balestra sued.  

And the Court was looking at the Shakespearean prose of Reg 31.3121(v)(2)-1(c):

(ii) Present value defined.— For purposes of this section, present value means the value as of a specified date of an amount or series of amounts due thereafter, where each amount is multiplied by the probability that the condition or conditions on which payment of the amount is contingent will be satisfied, and is discounted according to an assumed rate of interest to reflect the time value of money. For purposes of this section, the present value must be determined as of the date the amount deferred is required to be taken into account as wages under paragraph (e) of this section using actuarial assumptions and methods that are reasonable as of that date. For this purpose, a discount for the probability that an employee will die before commencement of benefit payments is permitted, but only to the extent that benefits will be forfeited upon death. In addition, the present value cannot be discounted for the probability that payments will not be made (or will be reduced) because of the unfunded status of the plan, the risk associated with any deemed or actual investment of amounts deferred under the plan, the risk that the employer, the trustee, or another party will be unwilling or unable to pay, the possibility of future plan amendments, the possibility of a future change in the law, or similar risks or contingencies.

Balestra tried, but he could not overcome the fact that the Regulations did not include “employer bankruptcy” as a possible reason to discount the amount of income accelerated for FICA tax – or, at least, to allow some of the FICA to be refunded once the actual payments are known.

Balestra lost his case.

The Court did realize the unfairness of the law, however.

It might have been wiser to have selected as a trigger something other than there being ‘no substantial risk of forfeiture’ … and instead considered the financial solvency of the employer – or to have deferred taxation while an employer is in bankruptcy, rather than until promised benefits are ‘reasonable ascertainable.”

You think?

But these are matters for law makers, not judges – suboptimal laws are still valid tax laws.”

I know. I would be more optimistic if I had any regard for the suboptimals in Congress.

Tile 26 of the United States Code would be a good deal shorter if the unwise tax laws could be purged by the judiciary.”

You must admit, it is easy to like this Court.

The IRS Will Be Looking At Deferred Compensation Plans

The IRS recently launched a limited audit effort to gauge how well nonqualified deferred compensation plans are complying with the tax Code. My understanding is that the number of companies to be contacted will be less than 100. The IRS will use this effort to refine its audit techniques in three areas of nonqualified deferred compensation:

1. Initial election to defer compensation
2. Subsequent election to defer compensation
3. Eventual payment of said compensation

Before proceeding further, let’s define the “nonqualified” part of this term. Someone is deferring compensation. Perhaps someone (say, Tom Brady) is earning $15 million this year, but some or all of it will not be paid until some future date. It happens all the time, and the IRS has limited “preapproved” ways to do so. The classic way is stock options, for example.

Deviate in any way from the IRS-preapproved road, however, and the plan is referred to as “nonqualified.” I use nonqualifieds on a common basis, as they allow more flexibility in their planning and implementation than qualifieds. There is no connation of good or bad to being “nonqualified.”

The IRS is looking at Section 409A, a particularly nasty Code section.

What was the purpose of Section 409A? Let’s go back to 2000 and 2001. We are now talking about Enron, an energy and commodities company headquartered in Houston and one of the most scandalous business frauds of all time. Enron executives pushed their way to the front of the line by accelerating the payout of their deferred compensation before the company went under. You may recall that the average employees were blocked-out of their 401(k)s, with the result that they saw their retirement dwindle if not evaporate while company fat cats, like Kenneth Lay and Jeffrey Skilling,  walked away with wheel barrels full of cash.

How did it evaporate? There were two primary drivers:

(1)  Enron made its 401(k) matching contribution with company stock. Then it put in a lockdown, preventing employees from selling that stock until age 50.

(2)  Enron decided to transfer the administration of its 401(k). Unfortunately, this occurred during the period the stock collapsed, and employees were preventing from selling their stock even if they could and wanted to.

The truth of the matter is that many companies, not just Enron, use their own stock to fund a 401(k). For example, Coca Cola employees keep more than 80% of their 401(k) assets in Coca Cola stock. At Proctor & Gamble, the percentage is over 90%.

So what we have is an issue of corporate 401(k) matching, as well as an issue of the interregnum between plan administrators. That was not sufficient for Congress, which loves nothing more than a good scandal (unless it is their own, of course). In response, Congress passed Sarbanes-Oxley in 2002. It then passed the American Jobs Creation Act – containing Section 409A – in 2004.

Congress was after deferred compensation.  

Section 409A starts off easy enough: it applies to any “plan” that provides for the “deferral of compensation” to “service providers.” A “plan” does not need to be reduced to writing, and “”service providers” can included independent contractors as well as employees. “Deferral” means any payment (to which a service provider has a legally binding right) that may be received in a future tax year.

            STEP ONE: Carpet bomb. Look for survivors later.

The IRS had to start excluding something, otherwise this thing was going to dragnet everything- think accrued sick leave or accrued vacation pay - into its wake. Remember: any compensation not paid IMMEDIATELY could potentially detonate this tax trap.

It didn’t matter how much money you made, either. This thing was not limited to the big wigs. Section 409A swept up the small and large alike.

How ridiculous does this go? A number of years ago the IRS decided that schoolteachers were violating Section 409A by deferring their salary over 12 months rather than being paid over the 9 months comprising a school year. Let that sink in: the IRS felt driven to protect Americans from the rapaciousness of schoolteachers wanting to budget their salary over 12 months.

NOTE: The IRS received so much bad press that it was forced to reverse its position. That was fine, but a more cogent question was whether the law was so deeply flawed that its logical progression inevitably led to absurd results.

Therefore, the IRS gave us a few exceptions, including:

·       “Short term deferrals”

o   This means being paid by March 15 of the following year

·       Qualified plans, which means pension and profit-sharing plans, including your 401(k)

o   Obvious

·       Certain welfare plans, such as vacation and sick leave plans

o   Obvious

·       Grants of incentive stock options (ISOs) and employee stock purchase plans (ESPPs)

o   Have their own rules

·       Options to buy the stock of the service recipient, but only if the exercise price is not less than the market value of the stock on the date of grant

o   This means that – if you work at P&G and can buy P&G stock through a plan, you had better pay full retail price. If P&G gives you a discount – say you buy for 90 cents on the dollar – the IRS sees this as a “feature for the deferral of compensation.”

What happens if you are pulled into this thing?

·       The plan better be in writing

·       You better make a timely election to defer

·       Distributions to you may only be made upon occurrence of six IRS-approved events

·        You better not be able to accelerate your deferred benefits

What is a timely election? It is not what you may think. Timely in this context means “before you earn it.” For example, if your 2014 bonus is payable in 2015, you had better have your election in place in 2013.

What if you want to make a change to an existing deferral?

·       The payment must be deferred for at least another five years

o   So if you were to start in 2017, you can now start no earlier than 2022

·       And you better make this change at least 12 months before the payment was scheduled to be paid

What do you have to do to get to your money?

·       Death

·       Disability

Good grief! What else have you got?

·       Separation from service

This means you have to be fired. 

·       Change in control

This means that there is a change in ownership or control of the company. I suppose you could sell the company AND get yourself fired, just to be certain.

·       Unforeseen emergency

Think illness or accident or property loss. Even then, you have to show that expenses could not otherwise be met by insurance or your liquidation of other assets. Goes without saying that amount of distribution is limited to the amount needed for the emergency, plus taxes.

·       Date certain or fixed schedule

Finally, here is the heart of the matter. The IRS wants you to select when the deferred monies are to be paid and how (lump sum, series of payments) and then stick to it. It wants you to decide this way ahead of time, and then severely penalize you if later life events cause you to change in your mind.

What happens if you botch it?  Well, Section 409A will kick-in. 

·       There is tax on the distribution

·       There is interest (called a “stinger”) equal to the regular underpayment rate plus 1%

·       There is a 20% penalty

What if you take a distribution early? Bam – you have tax, interest and penalty.

What if you do not do anything wrong, but the company flubs the paperwork? Bam – you have tax, interest and penalty.

Can you say lawsuit?

That 20% penalty is not calculated as you would expect, either. A reasonable person would anticipate the penalty to be 20% of the tax, or possibly 20% of the tax plus the stinger. It is not, however. The penalty is 20% of the deferred balance, whether received by you or not. 

            STEP TWO: Bayonet the survivors.

What if you are in several plans simultaneously and one goes south? Does one plan contaminate the other? 

Of course it does.

STEP THREE: Repeat steps one and two. 

So what did Congress really accomplish with Section 409A?

·       Inability to distinguish publicly-traded from privately-owned

I scratch my head why Congress thinks that my auto mechanic down the street can get himself in the same trouble as a Humana or a General Electric.

Publicly-traded stock is almost like cash. These companies can buy other companies with it. They can pay employees with it. They can fund retirement plans with it. They can … well, they can play Enron with it.  

A privately-owned company however cannot.  Privately-owned companies are playing with their own money. Even the most reckless take a pause when reaching into their own wallet. A publicly-traded executive is closer to a Washington politician than any of the business owners I am likely to represent.

·       Crippling tax bombs for the unadvised

Change your deferral payment date 363 days – rather than 366 - before scheduled payout and risk tax annihilation. 

Does Congress expect that every businessperson can keep a tax attorney on retainer?

·       Yet another tax “industry”

There are advisors out there specializing in Section 409A. There has to be. You could endanger a large company by implementing a faulty plan. 

However, this is not quite the same contribution to the economy as Steve Jobs introducing the iPhone, is it?   

·       Insinuation into routine business transactions

We have a client who recently hired a business development manager. Their intention is to grow the company for 7 or so years, then sell out. It is their retirement program of sorts, I guess. The deal with the development manager includes deferred compensation, driven off year-over-year business growth and eventual sale of the company. What should be a routine tax matter now requires a Section 409A specialist, to be sure the employment package doesn’t blow up.

You want an alternative to 409A? How about this: all accelerations of executive deferred compensation (remember: Enron was only about acceleration) have to go to a shareholder vote. While we are at it, let’s lock down the executives for the same period as the rank-and-file are locked out of their 401(k)s.

And if Enron was caused by acceleration, why does 409A penalize additional deferrals? What is the point?

So the IRS is going to be looking at 50 – to 100 large companies to check on their 409A compliance. I suspect these companies will be fine, as they have the people, resources and advisors to navigate Section 409A. I would give you a different answer were the IRS to train its attention on privately-owned companies, however.