According to the IRC, deferred compensation is subject to taxation in the year it is received or made available to the employee, whichever is earlier. Additionally, there are strict rules regarding when and how employees can access their deferred compensation. However, 409A does not apply to certain types of deferred compensation, such as pensions, 401(k) plans, and other qualified retirement plans.
The primary goal of Section 409A is to prevent employees from deferring significant portions of their compensation for an extended period without being taxed on it. This is to ensure equitable taxation and prevent the avoidance of income tax. If non-qualified deferred compensation does not comply with the rules under Section 409A, it may result in immediate taxation and substantial penalties for both the employee and the employer.
As a result, employers and employees must be knowledgeable about the requirements and limitations of Section 409A to ensure proper compliance and minimize potential tax consequences.