Review deferred compensation plans in light of IRS rules

Contract Language. By Steven M. Harris, AMNews contributor. June 4, 2007.

CONTRACT LANGUAGE

A column examining the ins and outs of contract issues

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A section of the IRS code that seemed to address Wall Street transactions turns out to be, on literal reading, something that could affect deferred compensation agreements common among medical practices and their owners.

In 2004, Congress made significant changes to the rules relating to nonqualified deferred compensation plans when it passed the American Jobs Creation Act, which added Section 409A to the Internal Revenue Code, effective Jan. 1, 2005. Section 409A subjects all nonqualified deferred compensation plans to income inclusion at the time of deferral unless they meet certain requirements under the statute and regulations.

On Sept. 20, 2005, the IRS issued proposed regulations regarding Section 409A, which extended certain rules for complying with 409A. Those regulations became effective Jan. 1 of this year.

Deferred compensation plans generally include any agreement, contract, or other arrangement which provides for the voluntary deferral of compensation by an employee. They usually call for compensation payments to be made at certain points in the future, typically following termination of employment. They also apply to plans that do not involve the actual deferral of current compensation by employees but simply are funded in the future.

For physicians, deferred compensation plans usually are found in one of two contexts. First, it is common for medical practices to include severance pay plans as a component of a buyout arrangement. The actual amount of the severance pay is typically based on the departing physician's interest in the practice's accounts receivable at the time of leaving the practice. Or, it is based on a liquidated sum that depends upon the physician's compensation and individual collections.