Using Pre-409A Money to Reduce Taxable IncomePublications | July 6, 2017
In light of possible reductions in corporate tax rates, some employers are looking for ways to use deferred tax assets to reduce taxable income before corporate tax rates are reduced. One such strategy to reduce taxable income is to pay out nonqualified deferred compensation (“NQDC”) before any potential rate reduction. While Internal Revenue Code (“Code”) Section 409A limits an employer’s ability to accelerate payments of NQDC, it may be possible for some employers to pay out NQDC that was earned and vested before Code Section 409A became effective.
When an employer pays out NQDC, the amounts paid are deductible by the employer and taxable to the employee (or former employee). In anticipation of this deduction, most employers treat unpaid NQDC as a deferred tax asset until the time the NQDC is paid. If corporate tax rates were to go down, employers would be well served to pay NQDC as soon as possible, because the potential deduction is larger at the current higher tax rates than it would be after any potential reductions to tax rates.
Code Section 409A generally prohibits employers from accelerating payments of NQDC. However, in general, Code Section 409A applies only to amounts deferred in taxable years beginning after December 31, 2004 (the “Effective Date”). Amounts deferred prior to the Effective Date may not be subject to Code Section 409A’s general prohibition against accelerations of payments. Depending on the terms of the plan or arrangement under which those amounts were deferred, an employer may be able to accelerate these NQDC payments to make them earlier than they are currently scheduled to be paid.
If you would like assistance in reviewing your NQDC plan(s) to see if you have the ability to accelerate payments and take advantage of a deduction before potential decreases in corporate tax rates, please contact your Kutak Rock attorney or a member of our Employee Benefits Practice Group.