Pub. 3 2019 Issue 2

By Bryan K. Bassett and John R. Madsen of Ray Quinney & Nebeker Do You Have Nonqualified Deferred Compensation (NQDC)? M any medical practices have nonqualified deferred compensation (NQDC) plans or arrangements as part of the compensation payable to a physician at the time of termina- tion of employment. In many cases, NQDC for a medical practice takes the form of payments after the date of termination of employment based on a physician’s collections from the accounts receivable attributable to the physician’s personal services. Depending on how such pay- ments are structured, the payments may constitute NQDC that is subject to the complex rules and potential penalties of Internal Revenue Code Section 409A (Section 409A). Internal Revenue Code Section 409A Section 409A was added to the Internal Revenue Code effective Jan. 1, 2005, and in general governs and regu- lates NQDC that is paid by a “service recipient” (i.e. an employer receiving the services) to a “service provider” (which includes employees, and which may include other service providers such as independent contractors, among others). Section 409A was enacted, at least in part, in response to the practice of corporate executives accelerat- ing payments under deferred compensation plans in order to access the funds before their company went bankrupt (for example, as happened with Enron); and also in part as a response by the IRS to reign in a perceived history of tax- timing abuse due to limited enforcement of the so-called constructive receipt tax doctrine. Unfortunately, the scope of Section 409A goes far beyond regulating large public companies and potentially applies to any business of any size with NQDC. What is Nonqualified Deferred Compensation (NQDC)? The effects of Section 409A are extensive due to the ex- ceptionally broad definition of deferred compensation. Un- www.UtahAFP.org | 26