CPM Executive Compensation & Equity Plans 3

Question 1

Section 409A of the Internal Revenue Code primarily governs:

Accepted Answer

Nonqualified deferred compensation (NQDC) arrangements

Answer

Section 409A imposes strict rules on nonqualified deferred compensation plans regarding election timing, permissible distribution triggers, and prohibited acceleration of payments.

Question 2

Under Section 409A, which of the following is NOT a permissible trigger for distributing nonqualified deferred compensation?

Accepted Answer

Employee's voluntary request to receive payment at any time

Answer

Section 409A restricts distributions to six specific permitted events (separation, death, disability, change in control, fixed date, and unforeseeable emergency); discretionary on-demand payments are prohibited.

Question 3

The tax consequences of a Section 409A violation to the employee include:

Accepted Answer

Immediate income inclusion of the deferred amount, a 20% excise tax, and premium interest charges

Answer

A 409A violation results in immediate income inclusion, a 20% excise tax on the deferred amount, and underpayment interest computed from the original deferral year — making violations extremely costly.

Question 4

For 'specified employees' of publicly traded companies, Section 409A requires a mandatory waiting period before receiving separation-triggered NQDC distributions of:

Accepted Answer

6 months after separation

Answer

Specified employees (key executives) of publicly traded companies must wait at least 6 months after separation from service before receiving NQDC payments triggered by that separation.

Question 5

Under Section 409A, an initial deferral election must generally be made:

Accepted Answer

Before the end of the taxable year preceding the year in which the services giving rise to the compensation are performed

Answer

The initial deferral election must be made before the end of the tax year preceding the year in which the services are performed, preventing deferral of compensation already earned.

(CPM) Certified Payroll Manager Practice Test

(CPM) Certified Payroll Manager Practice Test

CPM Executive Compensation & Equity Plans 3