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Following up on our July blog post, “Updates on the Nonqualified Deferred Compensation Audit Technique Guide,” we are pleased to share with you these further insights from Attorneys Greg Daugherty, Dave Tumen and Rich Helmreich of PorterWright. They raise the interesting question of whether the recent update of the NQDC Guide foreshadows the coming of other critical changes in executive compensation enforcement.
IRS updates Nonqualified Plan Audit Technique Guide—Is a new enforcement initiative on the horizon?
The Internal Revenue Service (IRS) recently updated its Nonqualified Deferred Compensation Audit Techniques Guide (NQDC). It released Publication 5528 (NQDC guide) on June 1, 2021. The IRS last updated the NQDC Guide in 2015. Interestingly, the 2015 NQDC Guide was published shortly after the IRS sent information document requests to publicly traded companies to determine how well companies were complying with Internal Revenue Code (IRC) Section 409A.
This latest update to the NQDC guide contains much more detailed guidance than the prior version. That is noteworthy because President Joe Biden and many members of Congress have been proposing to increase the IRS’s budget in order to provide more resources for audit initiatives. Could a new executive compensation enforcement initiative be on its way?
If so, employers need to be prepared with the following steps:
- Collect all potential arrangements that could be considered NQDC. Remember, depending on their terms, many types of plans and arrangements could be considered NQDC: Incentive and equity-based compensation plans, employment, change-in-control and severance agreements, in addition to traditional deferred compensation plans.
- Confirm whether the plan documents and administration comply with applicable law. The NQDC guide provides a discussion of legal authority with respect to NQDC. The legal discussion addresses the traditional constructive receipt and economic benefit doctrines, in addition to IRC Section 409A. IRC Section 409A focuses on the timing of deferral and payment elections, the events that trigger payment under NQDC plans and when payments are impermissibly accelerated or delayed. The legal discussion also focuses on improper funding arrangements of NQDC plans, particularly during times of financial distress.
- Review how employers describe their NQDC arrangements in public disclosures. The NQDC guide instructs IRS agents to review Securities and Exchange Commission (SEC) filings and notes to financial statements to learn about an employer’s potential NQDC arrangements and how they have been administered.
In summary, the NQDC guide provides a detailed update to the IRS’s instructions to auditors on how to examine NQDC arrangements. These instructions suggest that the IRS may be planning a new audit initiative. If that is the case, employers should consider reviewing the NQDC guide to conduct its own internal audit while there is still time to prepare for a potential IRS audit. The professionals at Porter Wright can guide and assist you through this process and help minimize any legal and tax penalty exposure.
This material has been prepared for informational purposes only, and is not intended to provide, and should not be relied on for, accounting, legal or tax advice. Any tax advice contained herein is of a general nature. You should seek specific advice from your tax professional before pursuing any idea contemplated herein.
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