IRS Expanding NQDC Audit Initiative

The IRS has expanded an audit initiative to test compliance with the rules for Nonqualified Deferred Compensation (NQDC) arrangements under Internal Revenue Code § 409A. The initiative was announced in 2014 and expanded to include more sponsors, including small- and mid-sized companies, in 2016. Employers that sponsor NQDC plans should ensure that their plans are in operational and documentary compliance with § 409A rules.

Section 409A applies to any arrangement that provides for compensation earned in one year to be paid in a future year. IRS audit activity has focused particularly on the following types of plans:

Salary Reduction Arrangements

Bonus Deferral Plans

Top-Hat Plans

Excess Benefit Plans

Individual employment contracts

Taxation and penalties for non-compliance are imposed on plan participants. In other words, in the event of violations, corporate officers and other participants may be liable for taxes due, plus penalties.

MSEC is monitoring the § 409A plan audit issue closely to keep members informed. For further information on this IRS initiative and steps you can take to ensure compliance, contact Kristen Borrego at 303.223.5359 or Peggy Hoyt-Hoch at 303.223.5449.