IRS rules governing non-qualified deferred compensation plans. Violations of Section 409A result in immediate income inclusion of all deferred amounts, a 20% excise tax, and interest penalties -- all imposed on the employee.
Why Section 409A matters for employers
Section 409A governs when deferred compensation may be distributed (only upon separation from service, disability, death, change in control, unforeseeable emergency, or a fixed date specified in advance) and prohibits accelerated distributions outside those triggering events. Plans must be in writing with clear deferral elections made before the compensation is earned.
The penalties for 409A violations are punishing and fall on the employee, not the employer. Once a violation occurs, all amounts deferred under the arrangement (not just the violating amount) become immediately taxable, subject to the 20% excise tax, and subject to an interest charge equal to the IRS underpayment rate plus 1%. Employers who administer NQDC plans must ensure 409A compliance is reviewed by qualified legal counsel.
How BEG handles Section 409A for clients
BEG Managed Payroll handles Section 409A as part of a fully managed payroll service at $25-$45 per employee per month. Clients do not need to track compliance rules, filing deadlines, or calculation methods related to Section 409A on their own. Everything is included. Learn about BEG Managed Payroll.
Frequently asked questions
Do employers have to manage Section 409A themselves?
No. A managed payroll provider handles Section 409A as part of full-service payroll. BEG manages this for clients at $25-$45 PEPM with no system migration required.
What happens if Section 409A is handled incorrectly?
Errors related to Section 409A can trigger IRS penalties, state agency assessments, or employee disputes. Catching and correcting errors before filing is far less costly than after-the-fact corrections.
How does BEG handle Section 409A for managed payroll clients?
BEG tracks, calculates, and remits everything related to Section 409A as part of fully managed payroll. Clients do not need to monitor compliance -- that is included in the service at $25-$45 PEPM.
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About the author
Anthony Moretti is VP of Sales at Business Executive Group, where he builds BEG's managed payroll and HR service verticals for employers across Dallas-Fort Worth and nationwide. He writes the BEG Payroll Glossary to give employers plain-English answers on payroll and compliance.
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