New rules: What’s considered ‘deferred comp’?

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in Compensation and Benefits,Employee Benefits Program,Firing,Human Resources

A great deal of confusion still swirls around one question: Which payments are covered by the new deferred-compensation rules described above. Let’s set the record straight on a few borderline calls: Short-term deferrals.

Short-term deferrals, including bonuses, aren’t affected by the deferred-comp rules if they’re paid within 21/2 months after the end of the year. Tip: State in writing that you intend to make bonus payments within that allotted time. Otherwise, the payment could be treated as deferred compensation.

Making deferred payouts within the 21/2-month window is the surefire way to avoid running afoul of the new deferred-comp rules.

Split-dollar life insurance. Split-dollar policies that provide either a death benefit or a loan provision aren’t treated as deferred comp. However, if the policy operates under the endorsement method, the employee will receive a deferred benefit subject to the new rules.

Severance pay. Severance pay is generally treated as deferred compensation. But an exception exists for severance paid due to an involuntary separation, as long as all benefits are paid within two years (and the benefits don’t exceed twice the employee’s salary).

Fringe benefits. Taxable fringe benefits are covered by the rules, but the IRS recently indicated that tax-free fringe benefits are exempt.

Independent contractors. Payments to contractors are treated as deferred comp if the person performs service for just one employer or doesn’t provide significant services for two or more employers.

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