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Year-end amendment deadline approaching for some NQDC plans

Executive Compensation|Health and Benefits|Total Rewards

By William (Bill) Kalten and Drew Kusner | November 9, 2020

Relief allowing employers to remove mandatory delay-in-payment provisions from some NQDC plans ends on December 31, 2020.

Special transition relief provided by the IRS that allows employers to remove mandatory delay-in-payment provisions from some nonqualified deferred compensation (NQDC) plans ends on December 31, 2020.

Normally, a company cannot simply eliminate a provision requiring a delay in payment for NQDC plan benefits accrued to date, because doing so would impermissibly accelerate payment of those benefits. The IRS addressed this issue in proposed regulations and provided special transition relief that allows employers to remove mandatory delay provisions by December 31, 2020.


Some nonqualified defined benefit and defined contribution plans contain a provision that permits (or may require) benefit payments to “covered employees” under Internal Revenue Code (IRC) section 162(m) to be delayed if the employer’s deduction for such payments would not be allowed under that IRC section. Section 162(m) limits the allowable deduction for compensation paid to covered employees of publicly held corporations to $1 million per year.

Such delay-in-payment provisions in NQDC plans are authorized under IRC section 409A regulations if certain conditions are met, including that the delay must apply to all scheduled payments that could be delayed under the exception and all payments to similarly situated employees must be treated on a reasonably consistent basis. Benefit payments delayed under this provision must be made in the first year the employer’s deduction would no longer be subject to the limit. In the past, this has typically been no later than when the employee separated from service and ceased to be a covered employee.

However, changes made to section 162(m) by the Tax Cuts and Jobs Act (TCJA) complicated this issue. The TCJA changed the definition of “covered employee” so that once an employee becomes a covered employee, he or she will always be a covered employee, even after employment is terminated. As a result, if an employer’s NQDC plan includes a provision that provides for a delay in payment until it is deductible under section 162(m), the payment may be delayed indefinitely.

The 409A regulations also provide an exception that permits payments to covered employees of compensation that qualify as short-term deferrals to be made after the applicable two-and-a-half-month period1 and continue to qualify as such if the employer reasonably believes that its deduction for such payment, if made as scheduled, would not be permitted under section 162(m).

Special transition relief

For NQDC plans providing employers with discretion to delay, the employer will simply not exercise discretion and pay amounts as originally scheduled. The IRS has indicated that an employer may delay the scheduled payment of “grandfathered”2 amounts without delaying the payment of “non-grandfathered” amounts without violating the uniformity and consistency requirements mentioned above.

For NQDC plans requiring a delay, a significant period of time may pass before payment of the entire NQDC plan benefit would be deductible, as discussed above. Further, the entire amount might never become deductible if the employee dies and the payment (or remaining amount due) is payable at death. The IRS indicated in the preamble of the proposed regulations that employers may remove this type of provision from a NQDC plan without penalty by December 31, 2020. The plan amendment may be limited to amounts not grandfathered under section 162(m) (i.e., payment of grandfathered amounts may continue to be delayed). In any event, if the amended plan requires the employer to make any payment before December 31, 2020, then the payment must be made by December 31, 2020.

Going forward

Companies should review their NQDC plan documents and, particularly if mandatory delay-in-payment provisions are included, determine whether those previsions should be removed.


1 The applicable two-and-a-half-month period is the period ending on the 15th day of the third month following the later of the end of the employee’s first tax year in which the right to the payment is no longer subject to a substantial risk of forfeiture, or the 15th day of the third month following the end of the employer’s first tax year in which a right to the payment is no longer subject to a substantial risk of forfeiture.

2 For more information on “grandfathered” amounts, see “Key takeaways from recently proposed 162(m) regulations,” Insider, February 2020.

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