Arrangements deferring compensation to a later year are subject to rules governing when deferral elections may be made and when payment may occur. Failures produce immediate income inclusion plus an additional tax and interest, borne by the employee.
Deferral elections must generally be made before the year in which the services are performed, with a limited exception for newly eligible participants and for performance-based compensation meeting conditions.
Permissible payment events. Separation from service, a specified date or schedule, change in control, disability, death, and unforeseeable emergency. No others.
Specified employees of public companies face a six-month delay on payments triggered by separation.
No acceleration of payment, with narrow exceptions, and changes to the payment schedule require an election made at least a year in advance with a five-year deferral of the payment.
What is caught. Not only formal deferred compensation plans. Severance arrangements, bonus plans paid after the short-term deferral period, phantom equity, discounted stock options, and some reimbursement arrangements can all be covered.
Short-term deferral exception. Amounts paid within a defined period after the year in which they vest are excluded, which is why most annual bonuses are outside the rules.
Separation pay exceptions cover involuntary separation payments within stated limits.