Sec. 409A was effective on January 1, 2005, and applies to nonqualified de-ferred compensation (NQDC), that is, compensation earned in one year but not paid until a future year. If NQDC does not meet the requirements of Sec. 409A, it will be subject to additional taxes, including a 20% additional income tax (Sec. 409A(a)(1)(B)(i)).
Teachers who teach only during the academic year but are paid over 12 months are subject to the Sec. 409A rules. For example, a teacher who is paid $54,000 from September 1 through August 31 ($4,500 per month) but who teaches from September 1 through June 30 earns $5,400 per month for 10 months of teaching. The difference between the amount earned from September 1 through December 31 ($21,600) and the amount paid for that period ($18,000) is treated as NQDC and is subject to Sec. 409A since it is not paid until the following year.
Final regulations issued in April 2007 (TD 9321) allow teachers to elect to annualize their salaries (i.e., be paid over 12 months) if they meet certain requirements. The final regulations are effective January 1, 2008, and the Service has clarified (IR-2007-142) that this new rule will not affect teachers during the current school year. School districts that choose to offer the annualization election to their teachers do not need to make any changes prior to 2008, and their employees will not be subject to additional taxes under Sec. 409A. In addition, the IRS clarified that school districts are not required to offer their employees the annualization election. (For more on the Sec. 409A regulations, see “Current Developments in Em-ployee Benefits and Pensions,” p. 682.)