What is Section 409A of the Internal Revenue Code?
Section 409A was enacted in 2004 to limit perceived abuses in deferred compensation and provide very specific limitations on deferred compensation arrangements, with significant penalties for failure to comply. Section 409A is broad in its reach and affects most nonqualified compensation plans and arrangements of private and public companies, including severance plans. In general, Section 409A (i) provides detailed rules for the timing of deferral elections; (ii) prohibits acceleration of payments of deferred compensation; (iii) permits payments only upon the occurrence of certain events; and (iv) substantially limits the ability to make further deferrals. What are “deferred compensation plans”? The definition of “deferred compensation plans” is extremely broad and can include plans or arrangements of the following types: • Elective deferred compensation plans (e.g., salary and bonus deferral programs) • Non-elective deferred compensation plans (e.g., SERPs) • Employment and change in
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