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CCH® PENSION — 12/16/08

IRS Provides Interim Guidance On Reporting, Wage Withholding Requirements For Deferred Comp

From Spencer's Benefits Reports: In Notice 2008-115, the Internal Revenue Service provides interim guidance to employers and payers on their reporting and wage withholding requirements with respect to amounts includible in gross income under IRC Sec. 409A. The notice also provides interim guidance to employers and payers on their reporting requirements with respect to all deferrals of compensation under Sec. 409A, and provides guidance to service providers on their income tax reporting and tax payment requirements with respect to amounts includible in gross income under Sec. 409A.

In general, the provisions of Notice 2008-115 reflect an extension of the guidance provided in Notice 2006-100 and Notice 2007-89, I.R.B. 2007-4, 998, applicable to calendar years 2005, 2006, and 2007. The new interim guidance is effective for calendar year 2008 and will remain in effect for subsequent calendar years until the IRS issues further guidance.

Sec. 409A provides that all amounts deferred under a nonqualified deferred compensation plan for all taxable years are currently includible in gross income to the extent not subject to a substantial risk of forfeiture and not previously included in gross income, unless certain requirements are met. In Notice 2005-1, C.B. 2005-1, 274, the IRS provided the following guidance with respect to reporting and wage withholding requirements for deferred amounts under nonqualified plans:

• An employer must report to an employee the total amount of deferrals for the year under a nonqualified deferred compensation plan in box 12 of Form W-2 using code Y.
• An employer must report amounts includible in gross income under Sec. 409A and in wages under IRC Sec. 3401(a) in box 1 of Form W-2 as wages paid to the employee during the year and subject to income tax withholding. An employer also must report such amounts in box 12 of Form W-2 using code Z.
• A payer must report to a nonemployee the total amount of deferrals for the year under a nonqualified deferred compensation plan in box 15a of Form 1099-MISC.
• A payer must report amounts includible in gross income under Sec. 409A and not treated as wages under Sec. 3401(a) as nonemployee compensation in box 7 of Form 1099-MISC. A payer also must report such amounts in box 15b of Form 1099-MISC.

On April 10, 2007, the IRS issued final regulations regarding the application of Sec. 409A, applicable for taxable years beginning on or after Jan. 1, 2009. Then, in Notice 2007-89, the IRS provided guidance to employers and payers on their reporting and withholding obligations with respect to deferrals of compensation and amounts includible in gross income under Sec. 409A during calendar year 2007. Most recently, on December 8, the IRS issued proposed regulations governing the calculation of amounts includible in income under Sec. 409A(a) and the additional taxes imposed by that section with respect to service providers participating in certain nonqualified deferred compensation plans.

Provisions Of The Notice

As specified by Notice 2008-115, until the IRS issues further guidance, an employer is not required to report amounts deferred during the year under a nonqualified deferred compensation plan subject to Sec. 409A in box 12 of Form W-2 using code Y. In addition, until the IRS issues further guidance, a payer is not required to report amounts deferred during the year under a nonqualified deferred compensation plan subject to Sec. 409A in box 15a of Form 1099-MISC.

However, Sec. 3401(a) provides that for income tax withholding purposes, the term “wages” includes any amount includible in gross income of an employee under Sec. 409A, and the payment of such amount is treated as having been made in the taxable year in which the amount is includible in gross income. Thus, an employer must treat amounts includible in gross income under Sec. 409A as wages for income tax withholding purposes. An employer is required to report such amounts as wages paid on line 2 of Form 941, Employer’s Quarterly Federal Tax Return; and in box 1 of Form W-2. An employer also must report such amounts as Sec. 409A income in box 12 of Form W-2 using code Z.

Amounts includible in gross income under Sec. 409A also are supplemental wages for purposes of determining the amount of income tax required to be deducted and withheld under IRC Sec. 3402(a), regardless of whether the employer has paid the employee any regular wages during the calendar year of the payment. The amount required to be withheld is not increased on account of the additional income taxes imposed under Sec. 409A(a)(1)(B). To the extent future guidance requires additional withholding, that guidance will only be prospective.

Other issues addressed by Notice 2008-115 include the calculation of amounts includible in income under Sec. 409A(a), the wage payment date of amounts includible in income under Sec. 409A(a), and protection from future additional reporting or withholding. The notice also addresses service provider requirements with respect to amounts includible in gross income under Sec. 409A.

For further information on Notice 2008-115, contact Don M. Parkinson at (202) 622-6040.

For more information on this and related topics, consult the CCH Pension Plan Guide, CCH Employee Benefits Management, and Spencer's Benefits Reports.

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