March 31, 2008
Deferred compensation arrangements issued by foreign-owned operations or by U.S. companies with operations abroad were not originally exempt from the application of Internal Revenue Code §409A. However, under proposed and now final regulations issued by the Internal Revenue Service (“IRS”), there are exemptions that apply which are geared towards limiting the effect of §409A on non-resident aliens and U.S. citizens or residents who participate in non-U.S. plans.
Companies now have until 31 December 2008 to review and inventory their deferred compensation arrangements and to bring these arrangements into compliance with IRC Section 409A to avoid inadvertent violations of these far reaching tax rules. These deferred compensation income tax rules place a regulatory burden on companies both domestically and internationally as the rules affect both foreign owned companies in the United States and domestic companies with operations abroad. The tax effect of breaching the regulations is severe, amounting to income tax plus an additional 20% excise tax for deferred compensation arrangements that do not comply with the Act
The 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 foreign plans that do not meet the IRC Section 409A requirements. However, where no exception applies, it will still be necessary for companies to amend the foreign arrangements to comply with the IRC Section 409A requirements in order to avoid the IRC Section 409A sanctions.