On November 30, 2006 the Internal Revenue Service ("IRS") issued Notice 2006-100 containing additional interim guidance on the reporting and wage withholding requirements for calendar years 2005 and 2006 with respect to deferrals of compensation, and amounts includible in gross income, under Internal Revenue Code Section 409A. The IRS previously issued Notice 2005-94 which waived the employer reporting and wage withholding requirements for calendar year 2005. Notice 2006-100 provides interim guidance for calendar years 2005 and 2006 as follows:
2006:
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For plans that have not violated Section 409A, an employer is not required to report amounts deferred during 2006 on Form W-2 or on Form 1099-MISC.
- For 2006, if there has been a violation of Section 409A with respect to a participant, an employer must treat amounts includible in gross income under Section 409A as wages for income tax withholding purposes and report such amounts on Form 941 (Employer's Quarterly Federal Tax Return). Such amounts must also be reported for 2006 on Form W-2 in Box 1 and in Box 12 using code Z, and on Form 1099-MISC in Boxes 7 and 15b.
All vested amounts subject to Section 409A deferred under a non-complying plan as of December 31, 2006, must be included in gross income and reported as wages by the employer, to the extent not previously included in gross income.
This amount is calculated as follows:
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For account balance plans, the amount deferred as of December 31, 2006, equals the vested account balance on that date that is subject to Section 409A.
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For non-account balance plans where the amount deferred is reasonably ascertainable, the amount deferred as of December 31, 2006, equals the present value of all future payments to which the employee has obtained a legally binding right as of that date. An amount is considered reasonably ascertainable on the first day on which the amount, form and commencement date of payments are known, and the only actuarial or other assumptions regarding future events or circumstances needed to determine the amount deferred are interest and mortality.
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For a plan providing a stock right (a nonqualified stock option or stock appreciation right), the amount deferred as of December 31, 2006, equals the amount the employee would be required to include in income if the right was immediately exercisable and exercised on December 31, 2006. Thus, the amount deferred on December 31, 2006, equals the fair market value of the underlying stock, less the sum of the exercise price and any amount paid by the employee for the stock right.
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For other amounts, the amount deferred as of December 31, 2006, must be determined under a reasonable good faith method.
2005:
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For plans that have not violated Section 409A, an employer is not required to report amounts deferred during 2005 on Form W-2 or on Form 1099-MISC.
- Employers, including those who relied on Notice 2005-94 for 2005 (which suspended the employer's reporting and withholding requirements) are required to file an original or corrected information return and furnish an original or corrected payee statement (Form W-2 or 1099-MISC) for 2005 for a non-complying plan, reporting any previously unreported amounts included in gross income under Section 409A for 2005. The determination of amounts includible in gross income to be reported for 2005 is subject to the same guidance as is applicable to amounts includible for 2006. The original or corrected information return must generally be filed by February 28, 2007 and the original or corrected payee statement must generally be furnished by January 31, 2007.
Trust Provisions:
- The guidance provides separate rules regarding amounts includible in income under Section 409A(b) resulting from the set aside of assets in a trust for certain high paid employees under certain circumstances (trust located outside the United States, transfers related to a change in the employer's financial health, and transfers when the employer's defined benefit plan is "at risk" or the employer is in bankruptcy).
- Such arrangements can, under Notice 2006-33, delay compliance until January 1, 2008, so as to avoid inclusion of income under Section 409A(b). Notice 2006-100 does not modify that relief.
- If amounts are transferred to a trust that triggers income inclusion and taxes under Section 409A(b), and the transfer is not eligible for relief under Notice 2006-33 (for example because a transfer occurred after March 21, 2006), an employer must make a reasonable good faith attempt to determine the amount includible in income for purposes of reporting and must treat the amount as wages for withholding purposes subject to the requirements of the interim guidance.
Employee Requirements:
- The following guidance relates to an employee's requirements for amounts includible in gross income under Section 409A:
- If an employee has not reported as income and paid any tax for amounts includible in gross income under Section 409A for 2005, he or she must file an amended 2005 return and pay any taxes due relating to such amounts. The amended 2005 return must be filed and additional taxes paid by the due date for the employee's 2006 income tax return, including extensions, in order to avoid late filing penalties.
- An employee must report as income and pay any taxes resulting from amounts includible in gross income under Section 409A for 2006.
- If an employee does not report and pay taxes due with respect to amounts includible in gross income under Section 409A for 2005 and 2006 in accordance with this interim guidance, the IRS may assert additional income taxes and late filing penalties to the extent the amount of taxes reported and paid for calendar year 2005 or 2006 was underreported or underpaid. Interest will apply to any underpayments.
- Any tax imposed under Section 409A on deferred compensation required to be included in gross income for 2005 and 2006 will be increased by the amount of interest imposed by Section 409A and an amount equal to 20% of the compensation required to be included in gross income.
The provisions of Notice 2006-100 are intended as interim guidance and the Treasury Department and the IRS are currently formulating general guidance with respect to the income inclusion requirements, additional taxes, and reporting and withholding requirements of Section 409A.
An employer that complies with the new interim guidance for 2005 and 2006 will not be liable for additional income tax withholding or penalties, or be required to file a subsequent corrected information return or furnish a corrected payee statement, as a result of future published guidance.
For more information, please contact a member of the Schiff Hardin Employee Benefits and Executive Compensation Group.
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