Outten`s Executives – Professionals Practice Group lawyers are experienced in all aspects of leadership and compensation. Although we are not tax lawyers, we understand the tax impact of latent benefits and we can review and negotiate deferred employment and compensation agreements to protect your compensation and avoid unnecessary pitfalls. When negotiating an employment contract, you must consider not only compensation, but also the tax consequences and issues that may arise because of the date or how you are compensated. To understand and avoid potential pitfalls, make sure your compensation agreement meets the requirements of Section 409A of the Internal Revenue Code, a law dealing with the taxation and regulation of deferred compensation plans. Deferred compensation is the portion of your work allowance that is earned in one year, but is payable only later. Deferred compensation is broad and includes long-term deferred compensation such as a deferred portion of the employee`s compensation, an annual bonus paid the following year as part of a bonus, a special payment upon arrival of a particular event – such as a change. B control – and even a right to severance pay in an employment contract or compensation plan. The Internal Revenue Code, Section 409A, proposes a complex set of rules relating to the tax treatment of deferred benefits. If deferred compensation is not exempt from 409A or does not meet its requirements, the total amount of payments (including unpaid compensation under the agreement) may become immediately taxable, and the IRS receives a 20 per cent fine and interest on the deferred shares. For the employer, deferred compensation is a means of attracting and retaining talented employees, especially important employees. Many deferral plans allow for forfeiture of pay when the worker voluntarily withdraws or is dismissed for no reason.
Many workers mistakenly feel that their deferred compensation is paid regardless of whether they leave or not and are unprepared for the deseemousness of mandatory savings and deferred cash. It`s often an unwanted surprise. Understanding your deferred compensation plan, with the help of a sophisticated employment consultant, is worth the time and investment. Poorly developed or under-considered deferred compensation agreements can result in claims, penalties, IRS audits and significant financial and tax consequences. On the other hand, a well-developed agreement can provide security and protect the worker from the risk of significant tax effects. Since 409A can be triggered both by the drafting of a deferred compensation agreement and by the manner in which payments are made, it is important to consult a lawyer both at the beginning of your employment and in the event of payment after the termination of your employment relationship. These penalties and interest charges are imposed on the employee and not on the employer. That is why workers must ensure that their deferred compensation agreements are developed to protect them from this possibility. A deferred compensation plan can also be defined as a kind of employee retirement plan, in which a worker voluntarily refuses a portion of his monthly salary, which allows him to save money for his retirement, because those same payments are only made to him in retirement.