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New Tax Rules May Affect Payments To Retiring Partners

By Michael Mooney

One of the most important provisions of the American Jobs Creation Act of 2004 establishes a new regime for taxing deferred compensation. Newly created Section 409A of the Internal Revenue Code likely will affect every arrangement now in place or hereafter adopted that promises the payment of deferred compensation to current and former employees, directors and other service providers. Such an arrangement may well include a partnership's unfunded retirement program for its partners.

With designated exceptions ' a tax-qualified retirement plan or a bona fide vacation leave, sick leave, compensatory time, disability pay or death benefit plan ' Section 409A requires that, in order to avoid adverse tax consequences, all compensation deferred under any plan or arrangement must meet several strict requirements, listed below. Deferred payments that fail to meet the new requirements will become fully taxable, and will also be subject to an extra 20% tax and interest, in the taxable year the amount vests.

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