IRS Amends No-Rule Policy for NQDC Plans

The IRS has announced that it is modifying its policy on issuing letter rulings on the tax consequences of Sec. 409A nonqualified deferred compensation (NQDC) plans (Rev. Proc. 2008-61). Sec. 409A plans were previously included in the “no-rule” area of Rev. Proc. 2008- 3, but the Service has decided that this stance was too restrictive.

The IRS will continue not to rule on the income tax consequences of establishing, operating, or participating in an NQDC plan. However, Rev. Proc. 2008-3 had a blanket prohibition on rulings involving inclusion in gross income of deferred compensation under NQDC plans. Under Rev. Proc. 2008-61, the IRS says it will rule on the application of certain other tax law provisions to taxpayers who participate in those plans, and it narrows the no-rule area by specifying the areas in which it will not rule.

The specified no-rule areas are the income tax (and income tax withholding) consequences of establishing, operating, or participating in an NQDC plan; whether a plan is subject to a totalization agreement (or similar plan) or is a broadbased foreign retirement plan; whether a plan is a bona fide vacation leave, sick leave, or compensatory time plan; and whether a plan provides for the deferral of compensation. Under the less-restrictive guidelines, the Service will rule on questions that do not fall within these areas, such as the estate and gift tax consequences of transfers of rights or issues relating to the application of FICA.