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Updated Nonqualified Deferred Compensation Plan Audit Guide

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In June the Internal Revenue Service released an updated Nonqualified Deferred Compensation Audit Technique Guide. This updated Guide replaces the initial Guide published in 2015. While it is too early to say whether the release of the updated guidance signals increased audit activity by the Service in the nonqualified plan space, plan sponsors of nonqualified deferred compensation plans may want to consider reading the updated guidance to re-familiarize themselves with the underpinnings of Section 409A of the Code. 

The updated Guide is written in a conversational style and provides a very good outline of key deferred compensation principles. While it may not provide new information for individuals that regularly practice in this space, it will almost certainly be a good initial read for those that are not familiar with Section 409A of the Code or for those that do not regularly work with deferred compensation programs.  Among other key concepts, the Guide touches on: (i) the complicated FICA tax rules that can be implicated by deferred compensation arrangements (and rules, in our experience, that some plan sponsors are not familiar with), (ii) the “funding” concepts that can apply to deferred compensation arrangements, (iii) the timing of the employer deduction for deferred compensation programs, and (iv) the reporting rules that apply to deferred compensation plans that violate Section 409A.  

Again, while we cannot say for certain that this new guidance will result in increased audit activity, we do think it might make sense for plan sponsors to practice some good hygiene relative to their deferred compensation arrangements and review those arrangements against this guidance, particularly against the “Examination Techniques” section of the updated Guidance.