IRS Issues Audit Technique Guide on Nonqualified Deferred Compensation Plans

The IRS has issued a new audit guide.  The Nonqualified Deferred Compensation Audit Techniques Guide (June 2015) has been issued by the IRS to guide agents in examining such programs.

The guide considers issues in all aspects of nonqualified deferred compensation (NQDC) arrangements, including:

  • Timing of inclusion in income and deduction by employer
  • Constructive receipt and economic benefit doctrines
  • Payroll tax implications of such plans
  • Application of the provisions of §409A to such plans

The guide includes a list of specific audit techniques to be applied to such arrangements, as well as how to recognize such an arrangement.

The guide also labels the following as an “Important Note”—and since it conceivably could disqualify a qualified retirement plan it’s a note that taxpayers also should take note of:

A NQDC plan that references the employer’s IRC § 401(k) plan may contain a provision that could cause disqualification of the IRC § 401(k) plan. IRC § 401(k)(4)(A) and Treas. Reg. § 1.401(k)-1(e) (6) provide that an IRC § 401(k) plan may not condition any other benefit (including participation in a NQDC) upon the employee’s participation or nonparticipation in the § 401(k) plan. Review NQDC plans looking for a provision that limits the total amount that can be deferred between the NQDC plan and the IRC § 401(k) plan. Also look for any NQDC provision which states that participation is limited to employees who elect not to participate in the § 401(k) plan. Contact Employee Plans in the TEGE Operating Division or Counsel in TEGE if provisions such as these are encountered.

Note that the emphasis above is in the original document.

Taxpayers with any arrangement where an employee earns a right to income in one tax year but is reporting the income in another year should review this document in order to insure that there are no exposures that should be taken care of before an agent arrives on the taxpayer’s doorstep.