The IRS says it intends to issue regulations permitting the acceleration of payments under a nonqualified deferred compensation (NQDC) plan to pay federal, state, local and foreign income taxes due on taxable pre-2009 Section 457A deferrals.
A recent Plan Sponsor Council of America (PSCA) bulletin summarizes the guidance provided in IRS Notice 2017-75, noting that Section 457A imposes substantial restrictions on the use of NQDC arrangements sponsored by certain foreign entities and applies to amounts deferred after Dec. 31, 2008. If Section 457A does not apply to an amount solely because the deferral was made prior to 2009, it would be includible in gross income no later than the last taxable year beginning before 2018 or the year in which the compensation becomes vested.
In Notice 2017-75, the IRS explains that the forthcoming regulations will provide that a change in the time and form of payment under a NQDC plan to pay federal, state, local and foreign income taxes due on pre-2009 deferrals will not be treated as an impermissible acceleration under Section 409A(a)(3).
The regulations providing the relief will be applicable as of Dec. 8, 2017, and the IRS notes that taxpayers may rely on the relief described in Notice 2017-75 until the regulations are finalized.
The regulations will also provide that to the extent a deferred amount was earned and vested before 2005 and was otherwise grandfathered from Section 409A, a change in the time and form of payment of the deferred amount to pay such taxes will not be treated as a material modification that would cause the plan to become subject to Section 409A.
The relief will apply only to the extent the amount of any distribution to pay such taxes is not more than an amount equal to the federal, state, local, and foreign income tax withholding that would have been remitted by an employer if there had been a payment of wages equal to the income includible by the service provider under Section 457A.
