News & Information

 

FEATURED PRODUCT

American Payroll Association (APA) Basic Guide to Payroll, 2013 Edition
It's more important than ever to be in compliance with payroll laws and regulations! How do you stay in compliance and avoid penalties? The APA Basic Guide to Payroll is written to make understanding the laws and regulations as easy as possible. And this single-volume guide is filled with tools to help you apply the law and make proper calculations – with ease!

Learn More »

CCH® PAYROLL — 04/10/09

Witness asks for changes to Code Sec. 409A taxable deferral regs

Seth Safra of Covington & Burling LLP, Washington, D.C., representing the ERISA Industry Committee, on April 2 asked the IRS and Treasury to make several changes to proposed regulations on deferred compensation under Code Sec. 409A. The regulations address the calculation of amounts includible in income under Code Sec. 409A, the calculation of additional taxes imposed on the taxable amount, and the employer's reporting of amounts includible in income.

Safra discussed calculating and reporting taxable deferrals, determining the date of inclusion, and providing safe harbors for calculating premium interest. He said the regulations should allow any assumption for calculating the amount of taxable deferrals, unless it would be grossly unreasonable. The regulations should also provide safe harbor presumptions to use for the calculation.

For example, Safra testified, the regulations require that assumptions for calculating the taxable amount assume that the employee separated from service on the last day of the tax year. This assumption will often be wrong. Instead, the regulations should allow employers to assume a fixed number of years of employment, to presume an average age of termination, or to assume the employee will work until a particular milestone, such as retirement age or a vesting date.

Safra objected to the regulations treating the last day of the year as the date of inclusion, even if the plan is corrected early in the year. This produces a harsh result, he said. The regulations should focus on the amount deferred at the time the plan is not compliant with Code Sec. 409A. Once the plan becomes compliant it is, in effect, a different plan, so the deferrals should not be determined under the corrected plan. Safra noted that the deferred amount is already determined using an individual approach.

Individuals must determine the amount of premium interest owed on taxable deferrals, Sara explained. This will be a difficult determination, since they will not have the benefit of actuaries, for example. In some cases, an individual will have to go back to prior years and reconstruct a hypothetical underpayment amount. He noted that some plans, such as excess benefit plans, do not track annual deferrals.

Safra suggested that the regulations allow the use of a safe harbor, such as a flat interest rate of seven to ten percent. As a shortcut for determining the underpayment, the regulations also should allow taxpayers to use their marginal tax rate for the prior year without having to figure out the tax effect of including the deferred amounts in income. To allocate deferrals, taxpayers could be allowed to use a straight-line approach or sum-of-the-years weighting, which would be larger in later years.

The regulations on deferral reporting should not take effect until there is a notice and comment period on Code Y reporting, Safra commented. He asked that plan recordkeepers be given more than 30 days to calculate and report the taxable deferrals. He suggested a delayed reporting date of 12 months.

Stephen Tackney, an attorney with Treasury's Office of Benefits Tax Counsel, questioned the use of reasonable assumptions as a safe harbor. "Won't employers and employees have an incentive to go with assumptions producing the lowest number?" he asked, which is likely to lead to valuation fights. Safra responded that people will not ant to fight over valuation and will use safe harbors if they are available.

Helen Morrison, Treasury's deputy benefits tax counsel, asked whether Safra's comments on the date of inclusion applied only to elective deferrals. Safra said his comments applied to every type of deferral, and that he would recommend using the date the plan is corrected as the inclusion date.

Visit our News Library to read more news stories.