The Internal Revenue Service (IRS) recently updated its "Nonqualified Deferred Compensation Audit
Techniques Guide." The Guide provides a framework for the
IRS to audit nonqualified deferred compensation (NQDC) plans. Since
the enactment of the American Jobs Creation Act of 2004 and the
addition of Section 409A to the Internal Revenue Code (Code), the
tax rules for NQDC plans have become increasingly complex. The
Guide offers some helpful insight into how the IRS interprets the
rules and intends to apply them in an audit, although it is not as
extensive as some practitioners had hoped.
Background
A NQDC is generally an arrangement to pay an employee or
independent contractor compensation in the future. NQDC plans
include various arrangements such as salary deferral plans, bonus
deferral plans, supplemental executive retirement plans (SERPs),
and excess benefit plans, as well as certain stock option, stock
appreciation rights, phantom stock, and similar arrangements.
