Updates to the 409A Rules

The Treasury Department and the IRS last week proposed changes to final and proposed regulations under Section 409A of the Internal Revenue Code. Compliance with 409A is required to avoid disadvantageous federal income tax treatment for a broad range of nonqualified deferred compensation arrangements. While not dramatically altering how the 409A rules work, the proposed changes offer generally helpful clarification in some areas and added flexibility in others.

Below is a summary of the most significant changes.

When is a "Payment" Made?

Current regulations do not contain a uniform rule for determining when a "payment" is made: some taxable events are treated as a "payment" for some purposes and not others, and the treatment of other payments is unclear. The proposal introduces a single rule, applicable for all purposes, that looks generally to when an event results in currently taxable income. Under the proposed rules, for example, a deferred amount subject to