Definitions

Generally, employers are required to report the amount of deferrals made by or on behalf of participants, and report (and, in the case of employees, withhold taxes in the event of) any "409A Inclusion Event". Section 409A of the Code does not change employers' obligations upon distributions (or, in the case of tax-exempt employers, upon vesting). These income tax rules are discussed in more detail below.

For purposes of this discussion:

• Code refers to the Internal Revenue Code of 1986;

• Service refers to the Internal Revenue Service;

• A deferral includes any contribution made by a participant to a deferred compensation plan for a taxable year, or any contribution made by an employer on behalf of a participant for such taxable year. A deferral may include earnings.

• A 409A Inclusion Event is any event that, due to a violation of section 409A of the Code, requires a participant in a deferred compensation plan to include current and prior deferrals in gross income (either as wages or non-employee compensation) during a taxable year.

• A distribution is any distribution of deferrals and earnings to a participant made pursuant to the deferred compensation plan.

• A deferral is vested when a participant's right to the amount deferred is no longer subject to a substantial risk of forfeiture.

Section 409A now requires that employers report:

• Deferrals under a nonqualified deferred compensation plan of employees in Box 12 of Form W-2 using code "Y" and of independent contractors in Box 15a of Form 1099-MISC;

• In the event of a 409A Inclusion Event, all current and prior deferrals of employees in Box 12 of Form W-2 using code "Z" and of independent contractors in Boxes 7 and 15b of Form 1099-MISC; and

• Distributions to both employees and independent contractors as under prior law."

Effective Dates

The reporting requirements of section 409A of the Code were originally effective for tax years beginning after December 31, 2005. See Notice 2005-2, 2005-1 I.R.B. 274. In late 2005, the Service suspended these reporting requirements until 2006. See Notice 2005-94, 2005-52 IRB 1208.