Guidance Provides Relief for 409A Income Reporting

The guidance provides relief from reporting deferrals that are not includible in income during those years. Under the relief, employers and other payers need not report annual deferrals of compensation that are not includible in income for 2005 or 2006 under Internal Revenue Code Section 409A on Form W-2 or Form 1009-MISC. Amounts includible in income under § 409A for 2005 and 2006 must be reported on Form W-2 or Form 1099-MISC.

Notice 2005-94 issued last year, which provided relief for reporting 2005 deferrals as income, said employers and other payers may have to file amended information returns to report amounts includible in income for 2005. However, Notice 2006-100 supersedes Notice 2005-94.

In addition, the notice provides guidance on how to meet income tax withholding requirements for amounts includible in income under § 409A for 2006. According to the guidance, “An employer is required to report such amounts as wages paid on line 2 of Form 941, Employer’s Quarterly Federal Tax Return, and in box of Form W-2. An employer must also report such amounts as Section 409A income in box 12 of Form W-2 using code Z.”

The notice also provides guidance to service providers on their income tax reporting and tax payment requirements for amounts includible in gross income under 409A for 2005 and 2006.

Also included in the guidance are interim rules for 2005 and 2006 on calculating amounts includible in gross income under 409A. The amount includible in gross income and required to be reported by the employer or payer equals the portion of the total amount deferred under the plan that, as of December 31, 2006, is not subject to a substantial risk of forfeiture as defined in Notice 2005-1, and has not been included in income in a previous year, plus any amounts of deferred compensation paid or made available to the service provider under the plan during the calendar year 2006. An amount properly reported by the employer or payer on a 2005 Form W-2, Form 1099-MISC, or Form W-2c or corrected Form 1099-MISC is considered previously reported and should not be reported again.

The notice provides calculation guidance for amounts in account balance plans, amounts in non-account balance plans that are reasonably ascertainable, amounts deferred under stock rights covered by 409A, and other deferred amounts.

Internal Revenue Code Section 409A was created by the American Jobs Creation Act of 2004.

The IRS and Treasury ask in Notice 2006-100 for comments to aid in their formulation of general guidance with respect to the income inclusion requirements, the additional taxes, and the reporting and withholding requirements of 409A. The notice is here.