- Multinational Employers May Have Obligations under IRC Section 409A
- October 7, 2008
- Law Firm: Faegre & Benson LLP - Denver Office
Internal Revenue Code Section 409A provides new rules regulating "deferred compensation." The rules govern the timing and form of deferred compensation elections. The rules also cover distributions of deferred compensation—including certain non-qualified pension programs.
Employers worldwide have until 31 December 2009 to review, inventory and bring their deferred compensation arrangements into compliance with Section 409A to avoid violations of these tax regulations.
Section 409A requires companies that receive personal services from a U.S. tax-paying employee to:
- Document, in advance of the services, any arrangement used to defer receipt of any of the compensation earned by the worker and follow specific rules when making any elections to further defer that compensation.
- Document, in advance, when such deferred compensation can be paid and follow strict rules that limit the circumstances under which the worker can be paid such deferred compensation.
- Limit the types of funding arrangements that can be used to make payment.
U.S. Citizens Subject to Section 409A—Even When Working Abroad
Multinational companies that employ U.S. citizens and/or resident aliens may face particular challenges in complying with the Section 409A rules. The United States employs a worldwide tax system under which U.S. citizens and U.S. resident individuals are generally taxed on all income, whether derived in the United States or abroad.
Compensation earned by a U.S. expatriate or resident alien is subject to U.S. tax laws regardless of the jurisdiction in which the compensation is earned. Therefore, the deferral of such compensation will be subject to Section 409A.
Fortunately, the Section 409A final regulations contain numerous exceptions that permit both U.S. citizens and resident aliens working abroad and non-resident alien individuals working within the United States, to accrue benefits under non-complying foreign plans without becoming subject to the Section 409A sanctions.
However, where no exception applies, it will be necessary to amend the foreign arrangement to comply with Section 409A requirements in order to avoid sanctions.
Multinational employers should make an inventory of the compensation arrangements extended to their global workforces, specifically, those arrangements that may have the effect of deferring compensation subject to U.S. taxes. This will involve looking at individual arrangements, group plans, written plans, unwritten arrangements—and both funded and unfunded arrangements.
Employers need to determine whether the compensation arrangements they have with their employees will be adversely affected by Section 409A—and whether exemptions are available.