The Treasury Department and Internal Revenue Service recently issued interim guidance regarding reporting and withholding requirements under 409A for 2007. Generally, the new guidance reflects an extension to 2007 of the interim guidance previously issued for 2005 and 2006. The new guidance:
- eliminates reporting obligations for compensation deferred in 2007;
- provides rules for employers and other payers to report and withhold on amounts includible in income under 409A for 2007; and
- provides rules for individuals to calculate taxes owed on amounts includible in income for 2007 by virtue of 409A.
The new guidance, in the form of Notice 2007-89, modifies Notice 2005-1. The guidance for 2005 and 2006, contained in Notice 2006-100, is not affected by this Notice.
Highlights of the New Guidance
Here are some of the highlights of Notice 2007-89:- No Reporting of Deferred Compensation Required in 2007 . Amounts deferred under a nonqualified deferred compensation plan in 2007 do not have to be reported on individuals’ Form W-2s or 1099-MISCs for that year.
- Reporting Requirements for Amounts Includible in Income Under 409A for 2007 . Amounts includible in income under 409A must be reported by payers to the IRS, and on Form W-2s and 1099-MISCs provided to individuals, for 2007.
- Withholding for Amounts Includible in Income Under 409A for 2007 . Amounts includible in income in 2007 under 409A are "supplemental wages" for purposes of determining income tax withholding obligations. However, because withholding is not increased for any additional 409A tax imposed on the income, individuals may be required to file estimated tax payments during the year. The new guidance contains a transition rule where, if a payer has not withheld a sufficient amount by December 31, 2007, the payer may pursue one of two options in order to make sure that any withholding liability is satisfied.
- Determining the Amount Includible in Income Under 409A . For purposes of calculating the amount that will be subject to any 409A taxes, the new guidance provides interim rules for amounts includible in income under 409A(a) (the provisions governing deferrals and payments) or 409A(b) (the provisions governing offshore funding, financial health triggers, and funding nonqualified benefits at a time when the employer has an underfunded qualified pension plan). The rules are complicated and address, among other issues, how to determine the "payment date" of 409A amounts, including amounts that are not actually or constructively received by the individual but are nonetheless includible in income.
- Relief from Future Guidance . Payers who comply with this interim guidance will not be required to further withhold or to file corrected forms for 2007 as a result of any future guidance issued by Treasury and the IRS regarding 409A reporting and withholding obligations.
- Individuals Must Include 409A Amounts in Income for 2007 . If an amount is subject to tax under 409A for 2007, individuals must include that amount in income, plus the two additional taxes imposed by 409A (the 20% tax and the interest determined using the underpayment rate plus one percentage point).
- Comments Requested . Treasury and the IRS have requested comments on any aspect of the new guidance. Comments must be submitted by February 13, 2008. The guidance is clear that the included provisions are interim guidance only.
The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.
