Code Section 409A…Here Today but Possibly Gone Tomorrow and Other Proposed Changes in the Tax Cuts and Jobs Act
November 9, 2017
Authored by: Jennifer Stokes and Serena Yee
Last week the House unveiled its tax overhaul plan, the Tax Cuts and Jobs Act (“Act”). The Act’s proposals related to employee benefits and compensation are as follows:
Nonqualified Deferred Compensation
Perhaps one of the most talked about aspects of the Act (at least among benefits practitioners) is the demise of Code section 409A and the creation of its replacement, Code section 409B.
Under the proposed Code section 409B regime, nonqualified deferred compensation would be defined broadly to include any compensation that could be paid later than the March 15 following the taxable year in which the compensation is no longer subject to a substantial risk of forfeiture, but with specific carve-outs for qualified retirement plans and bona fide vacation, leave, disability, or death benefit plans. Stock options, stock appreciation rights, restricted stock units, and other phantom equity are included expressly in the definition of nonqualified deferred compensation.
All nonqualified deferred compensation earned for services performed after 2017 would become taxable once the substantial risk of forfeiture no longer exists, even if payment of the compensation occurs in a later tax year. As a result:
- Stock options and stock appreciation rights would become includible in income in the year in which the award vests, without regard to whether they have been exercised.
- An employee’s deferral of any salary under a nonqualified deferred compensation arrangement until separation from service or otherwise would result in the inclusion of such amount in the employee’s income in the year earned.
- All salary