Deferred compensation of 10-month employees
The National Education Association (NEA) and NSBA have issued joint guidance on the tax consequences of deferred compensation under section 409A of the Internal Revenue Code. The purpose of the guidance is to clarify new rules issued by the Internal Revenue Service (IRS). In the summer of 2007, various media reported that under new § 409A regulations, school employees who work less than 12 months but receive their salary over all 12 months may have to pay an additional 20% income tax. In response to anxious inquiries from the education community, the IRS issued guidance in August 2007 clarifying that if a school district allows such “10-month” employees to elect to be paid over 12 months, such employees must submit a written election form to the district in order to avoid the additional tax on compensation deferred from one year to the next. An IRS “Frequently Asked Questions” (FAQ) document also issued at that time stated that the election requirements do not apply where the employer requires 10-month employees to be paid over 12 months. However, NEA and NSBA have been advised informally that the IRS now considers these arrangements subject to § 409A in most cases. In November, the IRS issued transitional guidance stating that the § 409A regulations do not become applicable until January 1, 2009. However, the IRS has not yet stated whether full compliance is required by the beginning of the 2008-09 school year. Pending further IRS clarification, the NEA/NSBA guidance recommends that districts implement a notice of election system by the 2008-09 school year. Sample notices for this purpose also are below. The guidance also specifically addresses early paychecks and lump sum payments in June. The guidance is for informational purposes and should not be used as a substitute for specific legal or tax advice.
NEA/NSBA guidance
NEA/NSBA sample notices
NSBA School Law pages on August IRS guidance and FAQs