IRS Issues Guidance Regarding Deferred Compensation Income Reporting and Withholding: Action Required for 2005 and 2006

On November 30, 2006, the IRS, in Notice 2006-100, issued guidance related to reporting and wage withholding requirements for calendar years 2005 and 2006 with respect to deferred compensation arrangements under Section 409A of the Internal Revenue Code of 1986, as amended (the Code). Notice 2006-100 supersedes Notice 2005-94, which alerted employers and payers last year that they might have to file amended information returns to report amounts includible in income in for 2005.

As noted in prior Morgan Lewis LawFlashes, Section 409A was added to the Code in the fall of 2004 and imposes a variety of restrictions on nonqualified deferred compensation arrangements with such restrictions effective, in general, on and after January 1, 2005. Deferred compensation arrangements that violate Section 409A requirements result in the imposition of a 20% additional tax on the individual benefiting from the arrangement, as well as regular income tax liability and a possible penalty interest assessment.

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