Tax Facts

3543 / What requirements are there for a private nonqualified deferred compensation plan under IRC Section 409A?

Congress imposed additional documentary and operational requirements in IRC Section 409A to avoid a current constructive receipt on a “nonqualified deferred compensation plan” at inception and during the life of a covered plan. Many of these new requirements actually are those that the IRS formerly required to receive a favorable private letter ruling on income tax deferral under a plan and so are not new.

Section 409A imposes requirements on plans in four primary areas:

  1. Minimum plan documentation

  2. Permissible Distributions

  3. Elections to defer

  4. Prohibited Accelerations

See Q 3544 to Q 3547 for a detailed discussion of each of these requirements.

Planning Point: Planners should assume that any compensation plan is covered by Section 409A and plan to comply with the form and operational requirements until and unless they have satisfied themselves that the plan (which may be for only a single person) is either 1.) specifically statutorily exempted – such as a 457(b) plan – or 2.) meets (or can be designed to claim) a regulatory exception – such as the short term deferral exception.

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