J.K. Lasser's Your Income Tax 2013: For Preparing Your 2012 Tax Return

2.7 Nonqualified Deferred Compensation

The rules for determining whether tax may be deferred under a nonqualified deferred compensation plan are governed by Code Section 409A. Section 409A applies generally to amounts deferred after 2004. Amounts deferred before 2005 are “grandfathered,” and thus generally exempt, but they become subject to Section 409A (unless excluded under IRS rules) if the plan is materially modified after October 3, 2004.

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Caution

Penalty and Interest on Nonqualified Deferred Compensation

If deferred pay is currently taxable under the rules of Code Section 409A, you must also pay a 20% penalty and interest at a rate 1% higher than the regular underpayment rate.

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Plans subject to and excluded from Section 409A.

Unless an exception applies, Code Section 409A applies to all plans, including arrangements between an independent contractor and a service recipient, and a partner and partnership, under which the service provider has a legally binding right during a year to compensation that is not actually or constructively received, and which is payable in a later year. The law does not apply to qualified retirement plans (such as 401(k) plans), Section 403(b) tax-deferred annuities, SIMPLE accounts, simplified employee pensions, and Section 457 plans; these are excluded from the definition of “nonqualified deferred compensation ...