IRS Suspends Deferred Comp Withholding and Reporting for 2005

January 5, 2006

Employers, including colleges and universities, that provided deferred compensation to employees or independent contractors will not have to comply with new requirements for withholding and reporting for 2005. The Internal Revenue Service's Notice 2005-94 suspended new rules under Section 409A for calendar year 2005, but left open the possibility that corrected W-2s or 1099s might be required later.

Section 409A, added to the Internal Revenue Code by the American Jobs Creation Act of 2004, provides that amounts deferred under a nonqualified deferred compensation plan must be included in gross income to the extent that they are not subject to a substantial risk of forfeiture and not previously included in income, unless the plan meets certain requirements. The IRS issued guidance in Notice 2005-1 on withholding and reporting requirements. Subsequently, proposed regulations were published on October 4 that would be generally applicable for tax years beginning after January 1, 2007.

Under Notice 2005-94, an institution is not required to report deferrals under nonqualified plans on Forms W-2, 941, or 1099 for calendar year 2005. Such amounts may also be excluded from wages for withholding purposes. However, employees and contractors must still include the deferred compensation in gross income and pay applicable taxes. The IRS acknowledges that it may have a hard time figuring out the proper amounts and timing without the information from the employer and promises to forgo penalties as long as the individual complies with forthcoming guidance. Further guidance on employers' and payees' reporting and withholding responsibilities is expected to be issued in the first half of 2006.

Questions about IRS Notice 2005-94 should be directed to Frederick L. Wesner, Office of Division Counsel/Associate Chief Counsel (Tax Exempt and Government Entities) at 202.622.6040.

The NACUBO contact on tax issues is Mary Bachinger, director of tax policy.