IRS increases scrutiny of nonqualified deferred compensation plans

March 2012

Overview

Continuing its increased scrutiny of executive compensation, the IRS has stepped up its audit activity with respect to the requirements for nonqualified deferred compensation arrangements under Code section 409A, as well as the $1 million annual deduction limitation on certain compensation paid to "covered employees" of publicly held corporations under section 162(m). The IRS has increased its enforcement activity with respect to section 409A since that provision's transition relief expired in 2009. A violation of section 409A can result in harsh consequences to the participants: current taxation of the deferral, an additional 20-percent federal income tax, and possible interest charges calculated at the underpayment rate plus one percent. Employers still may be able to take steps to mitigate possible penalties related to common errors in compensation plans.

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