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Research Center : Article

Jan 14,2009 | Towers Perrin

10 Compensation and Severance Pitfalls Under the 409A Rules

Section 409A of the Internal Revenue Code was enacted in 2004 and has been in effect since 2005, but the comprehensive and complex final regulations interpreting the provision formally took effect only January 1, 2009. As a result, “good-faith compliance” with the statutory provisions and transitional guidance is now no longer enough. Plan documentation and operations now need to conform to the final regulations, with limited exemptions for grandfathered deferrals earned and vested before 2005. Failure to abide by the final regulations comes with a hefty price. Specifically, affected participants will be subject to accelerated taxation, a 20% tax penalty and possibly additional interest.

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