IRS Suspends Section 409A Reporting and Withholding Requirements for 2005

The following article is being reprinted with permission of Greenberg Traurig.

The American Jobs Creation Act of 2004 (the "Jobs Act"), pursuant to which Section 409A of the Internal Revenue Code of 1986, as amended (the "Code") was enacted, imposed new reporting and withholding requirements for amounts actually deferred after December 31, 2004 pursuant to non-qualified deferred compensation arrangements.
" …the Internal Revenue Service issued Notice 2005-94, which suspends the foregoing new reporting and withholding requirements for the calendar year 2005."

Under these new rules, a plan sponsor is required to separately report all deferrals of compensation on a Form W-2 (for employees) or Form 1099-MISC (for non-employees), regardless of whether the compensation is taxable for that year under Section 409A. Notice 2005-1 issued by the Internal Revenue Service as interpretive guidance under Section 409A, states that the total amount of deferrals should be reported in Box 12 of Form W-2 using Code Y, in the case of deferrals by an employee, and in Box 15a of Form 1099-MISC in the case of deferrals by a non-employee.

The Jobs Act also amended Section 3401(a) of the Code to provide that “wages” subject to income tax withholding include any amounts includable in the gross income of an employee under Section 409A. Notice 2005-1 indicates that the amounts so includable in the income of an employee must be included as wages in Box 1 of Form W-2, as part of the total wages, tips and other compensation paid to the employee during the year and in Box 12 of Form W-2 using Code Z. In the case of non-employees, those taxable amounts are to be reported in Box 7 of Form 199-MISC and in Box 15(b) of Form 1099-MISC.

On December 9, 2005, the Internal Revenue Service issued Notice 2005-94, which suspends the foregoing new reporting and withholding requirements for the calendar year 2005. Notice 2005-94 cautions, however, that the relief it provides does not affect an employer’s obligations under pre-existing law with regard to the withholding of income and employment taxes on deferred compensation of employees. Thus, for example, an employer must still treat deferred compensation as wages for employment taxes as of the later of (i) when the services are performed or (ii) when the rights to such compensation is no longer subject to a substantial risk of forfeiture.

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