Few compliance violations impose tax penalties as severe as those that apply under Section 409A of the Internal Revenue Code to people covered under nonqualified deferred compensation agreements. If your clients have executive compensation arrangements such as a top-hat plan, a supplemental retirement plan, a severance agreement or another form of nonqualified deferred compensation agreement, there is a limited opportunity to amend those agreements to avoid accelerated federal income tax liability, premium interest on late tax payments and a 20 percent penalty. The most favorable treatment applies to agreements that are corrected by Dec. 31.
Top-hat plans cover a select group of highly compensated employees. Supplemental retirement plans provide benefits to certain highly compensated employees in amounts in excess of the contribution and benefit limits for qualified retirement plans. Other forms of nonqualified deferred compensation agreements include incentive plans and other arrangements in which income is earned and vested in one year and is paid in a later year.
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