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Employee Benefits
Law Update July
2008
IRS Issues New
Section 409A Guidance, Reducing School District Obligations
On July 1, the IRS published Notice
2008-62 to address common payment arrangements involving public school
employees who provide services during a 10-month school year, but who elect
or by contract must be paid over 12 months. Under IRS Code Section 409A
and other tax provisions, if a compensation system allowed a school employee
working in one calendar year to be paid the next calendar year, such
compensation might be treated as taxable income with a 20% penalty.
But under Notice
2008-62, if an employee receives "recurring part-year compensation" --
compensation that is reasonably anticipated to continue in subsequent years
and which begins in one tax year and ends in the next -- such will not be
subject to potential extra tax if two factors are met. First, the
arrangement does not defer payment beyond the last day of the 13th
month following the beginning of the service period (e.g., for the 2008-09
school year, payment is made by July 31, 2009).
Second, the amount deferred does not exceed the applicable dollar amount
under Code Section 402(g)(1)(B) ($15,500 in 2008).
The following example
reflects how the Notice applies: A school district employee works an August 1, 2008
to May 31, 2009 10-month school year and earns $60,000. The school district
pays teachers by contract over 12 months (August 1 to July 31). Since 5
months of the school year are in 2008 and 5 months are in 2009, this
employee earns $30,000 in both years. But under a 12 month payment
schedule, this teacher would be paid $25,000 in 2008 and $35,000 in 2009.
Because the amount the employee earns during 2008 that is paid during 2009
($30,000 minus $25,000, or $5,000) does not exceed the Section 402(g)(1)(B)
limit of $15,000, Section 409A does not apply.
The guidance is
effective for school years beginning July 1, 2008. The IRS
anticipates that these rules should exclude from Section 409A most
arrangements for school employees under which they are permitted to spread
out compensation over a school year (regardless of whether year-long payment
is mandatory or an option). Clearly Notice 2008-62 eliminates the need for
annual employee deferral election forms, except for unusual situations.
Also while not directly addressed in the Notice, it would appear that
contract provisions that allow employees to accelerate their summer
paychecks into one paycheck in May or June will not be subject to Section
409A requirements.
If you have any
questions, please contact
John T. Vogel at
(412) 594-5622 or
jvogel@tuckerlaw.com.
******
Employee
Benefits Law Group:
The Employee Benefits Law Group at Tucker Arensberg, P.C. has a diverse
client base of private and public employers. We are dedicated to working
with our clients to resolve complicated legal issues in a practical,
common-sense and cost-efficient manner. In doing so, we routinely work with
our clients to design, establish, implement, administer, and terminate many
different types of employee benefit plans. Refer to
http://www.tuckerlaw.com/practice/employee.html for more
information on the Employee Benefits Law Group.
TAX ADVICE
DISCLAIMER:
Any federal tax advice contained in this communication (including
attachments) was not intended or written to be used, and it cannot be used,
by you for the purpose of (1) avoiding any penalty that may be imposed by
the Internal Revenue Service or (2) promoting, marketing or recommending to
another party any transaction or matter addressed herein. If you would like
such advice, please contact us.
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