PSC retirement agreements may be subject to sec. 409A prop. regs.

Many deferred compensation agreements between personal service corporations (PSCs) and their retired owners are subject to a limit based on the PSC's net income. This limit is meant to protect the PSC if it experiences financial difficulties. Typically, if the cap comes into play, the amount otherwise payable is added to the end of the agreement.

Once the deferred compensation is earned, Sec. 409A permits changes to the payment schedule only under limited circumstances. For instance, generally any changes in the timing of a distribution must be made 12 months before the date of the first scheduled payment; the delay in the payment must be for at least five years from the date the payment would have otherwise been made.

Applying these rules to payment caps used by PSCs could result in the retroactive inclusion of these retirement benefits in income on vesting, and an additional 20% penalty. The AICPA is drafting comments on the proposed regulations seeking clarification in this area. For example, do the rules on payment delays apply to PSC retirement agreements?

The AICPA believes that the proposed rules do not adequately address the determination of payment amounts. For example, if payments are capped based on an objective written formula, rather than at the firm's subjective discretion, is the cap acceptable under Sec. 409A? The AICPA will continue to keep members informed of developments in this area.

Eddie Adkins, CPA, Partner, National Tax Office, Grant Thornton LLP, Washington, DC