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IRS and Treasury provide interim reporting and withholding guidance under 409A

Feb 11, 2009

During December 2008, the IRS and Treasury issued three key pieces of guidance related to Code section 409A – (1) guidance related to correcting certain operational failures under 409A, (2) guidance on reporting and wage withholding under 409A and (3) proposed regulations on income inclusion for failures to comply with 409A. In this article, we address that second piece of guidance. Readers should consider that the three pieces of guidance are intentionally intertwined and that consideration of any one without consideration of the other two will likely leave many questions unanswered.

For the second piece, the IRS and Treasury published Notice 2008-115 providing interim guidance on reporting and wage withholding under Code section 409A. The guidance, which is for calendar year 2008, is strikingly similar to that issued for calendar years 2005, 2006 and 2007. It will also apply to future years until or unless the IRS and Treasury issue new guidance. In this article, we review it briefly.

The notice provides that until further guidance is issued, Code Y reporting is not required. That is, service recipients (employers) are not required to report amounts deferred during the year under a nonqualified deferred compensation plan subject to 409A in Form W-2, Box 12, by using Code Y. Analogous instructions relate to Form 1099-Misc, Box 15a, Code Y.

However, to the extent that any income is includible in gross income under 409A for the 2008 year, it must be reported in all three of the following ways:

On line 2 of Employer’s Quarterly Federal Tax Return, Form 941

In Box 1 of Form W-2

In Box 12 of Form W-2 using Code Z

Further, amounts included in income under 409A are considered to be supplemental wages for purposes of determining income tax to be deducted and withheld. The notice provides that the amount to be withheld is not to be increased for 2008 on account of taxes imposed under 409A. If future guidance should be different, the notice assures that it will be applied on a prospective basis only.

Finally, this notice acknowledges the proposed income inclusion regulations under 409A, as well as the corrective procedures available under Notice 2008-113, and notes that the three documents should be considered together when reading any one of them.