Nonqualified Plan Need Amended by December 31, 2020?

Wednesday, November 25, 2020

Part 162(m) of the Inner Income Code (“Code”), which disallows the deduction by any publicly held company with respect to sure compensation paid to a lined worker over $1,000,000, was amended by the 2017 Tax Cuts and Jobs Act (“TCJA”). One change made to Part 162(m) of the Code as a part of the TCJA was that if a person is a “lined worker” for a taxable yr, the person continues to be a lined worker for all future taxable years, together with after termination of employment.

Individually, however the final prohibition on the discretionary delay of funds underneath Part 409A of the Code, the Treasury Laws underneath Part 409A present that an employer could select to delay a fee underneath a plan if it moderately believes the deduction with respect to the fee won’t be permitted underneath Part 162(m) of the Code (the “Delay Exception”). Whereas such discretion shouldn’t be required to be included inside a plan doc, some plans do mandate deferral of fee the place it’s cheap to consider the fee won’t be deductible underneath Part 162(m) of the Code. Because of the change made by the TCJA famous above, such a provision might successfully forestall a fee from ever changing into payable as a result of as soon as a person is a lined worker the person by no means loses that standing, even after termination of employment.

In response, within the Preamble to proposed Treasury Laws underneath Part 162(m) of the Code, the Inner Income Service introduced that if a plan topic to Part 409A of the Code is amended to take away any Delay Exception language, the modification won’t lead to an impermissible acceleration of fee underneath Part 409A of the Code (usually such an modification would trigger a Part 409A of the Code violation). Nonetheless, the plan modification have to be made no later than December 31, 2020. The Preamble clarifies that the modification could be made to use to quantities that aren’t grandfathered for Part 162(m) of the Code functions solely or that it will possibly apply to all quantities deferred (each grandfathered and non-grandfathered for Part 162(m) of the Code functions).

The Preamble signifies this particular rule will probably be integrated into Treasury Laws underneath Part 409A of the Code and that taxpayers could depend on the steering within the Preamble till sure future steering is issued.