IRS Explains 409A Issues Specific to School District Employee Salaries

9/11/07

In August 2007, the Internal Revenue Service issued guidance explaining how Code Section 409A and its regulations affect school district employees.  Giving school year employees the option to be paid over a 12-month period can create deferred compensation under 409A. If the arrangement does not meet the 409A requirements, these employees would be subject to a 20% excise tax. 

 

Although school districts are not required to offer employees a choice between payment over the school year or a 12-month period, it is a common practice.  If school year employees are given the option to elect payment over the school year or 12 months, 409A requires that employees make an irrevocable election in writing or electronically before the beginning of the school year.  This rule goes into effect for school years beginning on or after January 1, 2008.  Employees of school districts that do not provide an election are not subject to the 409A requirements.

 

School districts that offer elections must set forth in writing by January 1, 2008 how their employees are to be paid for the rest of the school year.  This cannot be changed after January 1, 2008.  Then, starting with the 2008-2009 school year, Section 409A requires employees to make irrevocable elections of the payment period, in writing, prior to the beginning of the school year.

 

School districts that offer employees the option to be paid over a school year or 12-month period are strongly encouraged to determine whether they meet the requirements of 409A.