For many who are fortunate enough to be the beneficiaries of executive [levels] of compensation, the good news is that most are still not getting audited. However, with the interplay of Code Sections 83 (constructive receipt and the economic benefit doctrine plus some other related stuff), 162(m) (the million dollar pay cap), 409A (taxing people to death when they mess up their deferred compensation programs), and 3121(v) (FICA tax on deferred compensation), the IRS has plenty of things to audit. Surprisingly, at least to this writer, we're finding that they are catching people on some fairly tricky applications of the law.
Notably, I've seen or heard of multiple people getting dinged on these infractions:
- Stock awards that vest at a retirement date, causing constructive receipt under Section 83
- Linked retirement plans where the offset from the qualified plan is not well enough specified, causing a 409A violation
- Failure to pay FICA tax on deferred compensation that employers didn't realize technically was deferred compensation
- Improperly constructed performance pay plans that run afoul of 162(m) by not qualifying as performance pay
- Severance pay plans that did not have a 6-month payment delay for specified employees because they looked like broad-based plans. The fact that the compensation considered exceeded the pay cap (401(a)(17)) caused the problem.
- A 409A plan having a plan document that specifies for one set of administrative procedures, but the plan being administered the way it always was before someone wrote a document without bothering to check to see how it was being administered.
There are more, plenty more. There are a few ways that you can handle this.
- Do nothing and play audit roulette.
- Have your documents reviewed by someone other than the person who wrote them (the person who wrote them will read what they intended even if nobody else reads it that way).
- Have your administrative processes reviewed by someone who is not your administrator, but has experience with the administration of nonqualified deferred compensation plans.
- If you find problems, take corrective action. The IRS has been nice enough to give us corrective methods that lessen or eliminate the additional tax burden, but only if you fix them before the IRS catches you.