Requests to the IRS for relief under section 409A amid the coronavirus pandemic are unlikely to be fulfilled because the statute restricts executive access to nonqualified deferred compensation during financial downturns, according to an agency official.
“It’s very hard to give relief if the relief is more access to the deferred compensation at this point,” Stephen Tackney, deputy associate chief counsel (employee benefits), IRS Office of Associate Chief Counsel (Employee Benefits, Exempt Organizations, and Employment Taxes), said July 28. “It seems to cut against the very concept of [section] 409A.”
Speaking during an American Bar Association Section of Taxation webinar, Tackney said that once the issue is explained in those terms, “I think people kind of understand the tension and that perhaps, if anything, a statutory change would be needed.”
People are also asking the IRS whether reduction in pay constitutes an unforeseeable emergency under section 409A, Tackney said. The answer depends on the executive, he said.
There has to be “a severe financial hardship to that particular executive,” such as imminent foreclosure on a house, Tackney explained, adding that “it is not the hardship distribution standard; it is the unforeseeable emergency standard.”
That standard must be considered on a case-by-case basis, Tackney continued. “There are certain folks, depending on their particular arrangements, [for which] an entire loss of income may not result in a severe financial hardship,” he said.
Tackney warned that if a plan gives all individuals access to their money based only on a pay cut, “that can quickly lead to an operational failure.”
Tackney also addressed section 409A and performance-based compensation, in particular what constitutes subjective criteria. He said the outcome must be “substantially uncertain” when the criteria are established and must remain substantially uncertain through the time of the deferral.
“We will look, and if [a criterion] is everybody who gets an excellent or above on their review, and everybody has gotten an excellent or above on their review for the last decade, that’s not substantially uncertain that you’re going to get an excellent review,” Tackney said. “Can you really have subjective performance criteria that are substantially uncertain if everybody in fact makes that performance criteria?”
The section 409A regulations try to make it clear that a plan cannot use subjective criteria “as a substitute to allow late deferral elections simply by having subjective criteria that everybody meets,” Tackney said.