• A 409A deferred compensation plan applies to compensation that is paid at a future date from when it was earned. The term 409A is expressly used to distinguish nonqualified deferred compensation from qualified deferred compensation plans such as pensions and 401ks. A common example of deferred compensation is when a teacher is paid year-round but only works during the school year. The Internal Revenue Service administers and sets regulations for 409A deferred compensation plans.
  
  

Requirements

• To be eligible, an employee must elect to have a portion of his wages earned paid out in a future year. For example, If a teacher works from August 2009 through May 2010, but elects to be paid her earned wages throughout a 12-month period (August 2009 through July 2010), her wages earned in 2009 are being paid in 2010. For 409A deferred compensation plans to comply with Internal Revenue Service (IRS) guidelines, the payment plan between an employer and an employee must specify the future payment schedule and directions for what to do with past earned wages in the event of the employee's death, disability or other unforeseen emergency.
  
  

Employer Election to Offer 409A

• Employers are not required to offer deferred compensation arrangements to their employees. The IRS regulations expressly give employers the authority to determine whether they will or will not elect to offer deferred compensation plans. Under IRS regulations, however, an employer cannot elect to offer deferred compensation to some employees but not others.
  
  

Tax Regulation

• As long as a deferred compensation plan between an employer and an employee meets IRS requirements, there is no effect on an employee's taxes. The wages are taxed at the time they are paid and in the same manner as all wages not covered by section 409A are taxed. However, if the deferred compensation plan fails to meet 409A requirements, employees are subject to additional taxes, including an additional 20 percent income tax. There is no effect on FICA (Social Security and Medicare) tax either way.