Company Self-Audits Help Avoid § 409A Penalties

Originally published August 27, 2010

Keywords: Benefits, Section 409A, deferred compensation, deferral election, self-audit

Although companies are operating under severe budget and resource constraints, many have concluded that it is both worthwhile and cost-effective to engage in a self-audit of the administration of their nonqualified deferred compensation arrangements to ensure compliance with section 409A of the US Internal Revenue Code.

Reasons for Early Self-Audit

Section 409A applies to nonqualified deferred compensation, as that term is very broadly defined by the tax code and IRS regulations. The requirements imposed by section 409A are complex, and penalties for noncompliance are often severe. Although most violations of those requirements result from actions by the company, the tax penalties for violations of section 409A are imposed on the employee or other service provider (the "participant"). There is limited opportunity to correct even minor or