James F. McDonough
Of Counsel
732-568-8360 jmcdonough@sh-law.comKey Contacts
Back
Tax professionals frequently encounter non-qualified deferred compensation plans (“NQDCA”) in the context of an estate or business. NQDCA’s include any arrangement where an employee or a service provider (independent contractor) receives a legally binding right to receive compensation in one year but it is not actually received until a later year. A legally binding right includes those situations where the service provider has the right to receive income if conditions are met. The inherent problem is that many plans in place have not been reviewed for compliance and have not been modified to satisfy these rules. The consequences of an IRC §409A violation are severe and include a back income tax, interest from the original date of deferral, and a penalty equal to 20% of the deferred compensation.
§409A was enacted in 2004 and regulations, consisting of nearly 400 pages, were issued in 2007. §409A also applies to a NQDCA between a partnership and its employees. Partnership equity awards are covered by a separate set of rules, at least for now.
§409A does not trigger recognition of income if the NQDCA satisfies certain requirements. First, deferrals in advance of having the right to the income must be made by the service provider (employee, independent contractor). Second, there must be a definite payment schedule which may include payments to be made after death or upon disability of the service provider, on a change of control or unforeseen emergency. Third, employees of publically traded employers must wait six months before receiving payment. Fourth, a service provider may alter a payment schedule by accelerating or deferring payments for Qualified Domestic Relations Order, but not beyond five (5) years.
An individual relying on NQDCA payments for retirement income would do well to ensure compliance. An individual owning an interest in a business would be well advised to become compliant to protect the value of the enterprise. Finally, clients who contemplate selling their businesses would do well to address the issue before due diligence begins and the sales price of the business is diminished by the potential liability.
- Practices: Tax, Trusts & Estates
- Locations: Red Bank, NJ, New York City, Little Falls, NJ
No Aspect of the advertisement has been approved by the Supreme Court. Results may vary depending on your particular facts and legal circumstances.
Related Posts
See all
Breach of Contract Explained: Types and Consequences
Breach of contract disputes are the most common type of business litigation. Therefore, nearly all New York and New Jersey businesses will likely have to deal with a contract dispute at least once. Understanding when to file a breach of contract lawsuit and how long you have to sue for breach of contract is essential […]
Author: Brittany P. Tarabour
How to Dissolve a Corporation in New Jersey: A Step-by-Step Guide
Closing your business can be a difficult and challenging task. For corporations, the process includes formal approval of the dissolution, winding up operations, resolving tax liabilities, and filing all required paperwork. Whether you need to understand how to dissolve a corporation in New York or New Jersey, it’s imperative to take all of the proper […]
Author: Christopher D. Warren
Gross Lease vs. Net Lease: Understanding the Key Differences
Commercial leases can take a variety of forms, which is often confusing for both landlords and tenants. Understanding the different types, especially the gross lease structure, is important when selecting the lease that best suits your needs. One key distinction between lease types is how rent is calculated and paid. This article addresses the two […]
Author: Robert L. Baker, Jr.
What to Do If You Are Impacted by a Retailer Bankruptcy Part 2
Over the past year, brick-and-mortar stores have closed their doors at a record pace. Fluctuating consumer preferences, the rise of online shopping platforms, and ongoing economic uncertainty continue to put pressure on the retail industry. When a retailer seeks bankruptcy protection, a myriad of other businesses are often impacted. Whether you are a supplier, customer, […]
Author: Brian D. Spector
The Current Administration's Proposals for the Financial Services and Banking Industries Will Affect Your Business
Since his inauguration two months ago, Donald Trump’s administration and the Congress it controls have indicated important upcoming policy changes. These changes will impact financial services policies and priorities. The changes will particularly affect cryptocurrency, as well as banking rules and regulations. Key Regulatory Changes in Cryptocurrency For example, in the burgeoning cryptocurrency business environment, […]
Author: Dan Brecher
Tips for Commercial Landlords Impacted by Wave of Retailer Bankruptcies Part 1
The retail sector has experienced a wave of bankruptcy filings over the last year. Brick-and-mortar businesses in financial distress include big-name brands like Big Lots, Party City, The Container Store, and Vitamin Shoppe. When large retailers seek bankruptcy protection, they are not the only businesses impacted. Landlords can be particularly hard hit. While commercial landlords […]
Author: Brian D. Spector
No Aspect of the advertisement has been approved by the Supreme Court. Results may vary depending on your particular facts and legal circumstances.
Sign up to get the latest from our attorneys!
Explore What Matters Most to You.
Consider subscribing to our Firm Insights mailing list by clicking the button below so you can keep up to date with the firm`s latest articles covering various legal topics.
Stay informed and inspired with the latest updates, insights, and events from Scarinci Hollenbeck. Our resource library provides valuable content across a range of categories to keep you connected and ahead of the curve.