The primary purpose of Internal Revenue Code ?409A was to curb perceived abuses in non-qualified 
deferred compensation agreements or supplemental executive compensation plans (SERP) for executives of large corporations. However, ?409A also applies to small corporations, LLCs, partnerships, sole proprietorships, and non-profit organizations. In certain circumstances, it may even apply to outside service providers, including independent contractors and board members.
Even during good economic times, compliance with ?409A may be difficult for small companies. However, during bad times, ?409A may create additional hurdles for small employers and their executives.
For example, if faced with a cash flow bind, an employer may wish to terminate a NQDC plan and accelerate the vested benefit payments to the employee. Under the old law, the accelerated benefits would simply be taxed as ordinary income. Now, the acceleration of benefits provisions of ?409A may impose an additional 20% penalty tax on this transaction, which otherwise might be a proper and reasonable solution to the problem.
Funding either NQDC plans or SERPs may impose cash flow burdens on small companies. When an employer finds it necessary to alter or terminate a NQDC plan, the employer should discuss alternatives with the employee covered by the plan. Sometimes the parties may find it better to change the plan benefits, reduce the funding, or even terminate the plans and pay some lesser current benefit in lieu of the future benefit.
Many NQDC plans are informally funded with life insurance owned by the company. If such funding exists, the employer should review and determine the suitability of the current life insurance coverage given the current cash flow of the business. The employer may want to consider the following options.
? Continue but minimally fund. The employer may continue the plan but contribute only enough premiums to the life insurance policy to keep it in force. This approach may underfund the plan for purposes of cash value accumulation, but it does preserve the death benefit for such purposes as cost recovery or payment of survivor benefits. Ideally, the employer could increase funding later to catch up cash values. In some cases, replacing the current policy with a more suitable life insurance policy may be the best option.
? Reduce the benefit under the plan. After discussing with the employee, the employer may want to reduce the benefit payable under the plan, and thereby reduce the cash funding permanently. However, ?409A has numerous rules that apply to changes in time and form of payment.
If such elections are given to employees, they must not take effect for at least 12 months and generally may delay payment for 5 years or more. For plans that are grandfathered for ?409A purposes, a change could represent a "material change" that could make the plan subject to the ?409A provisions.
? Terminate the plan and wait for a ?409A distribution trigger. Unless distributions of deferred compensation occur upon one of six "triggering events" specified under ?409A(a)(2)(A), the distributions will result in immediate recognition of all income deferred and not previously recognized under the plan. The taxable amounts may also be subject to the 20% penalty tax. These six enumerated triggering events are:
–Separation from service;
–Death of the employee;
