JOURNAL OF DEFERRED COMPENSATION

Wolters Kluwer Journal of Deferred Compensation Distribution Center 7201 McKinney Circle Frederick, MD 21704 Return Postage Guaranteed JOURNAL OF DEFERRED COMPENSATION VOLUME 23 NUMBER 3 SPRING 2018 JOURNAL OF DEFERRED COMPENSATION Nonqualified Plans and Executive Compensation Editor: Bruce J. McNeil, Esq. JDC VOLUME 23, NUMBER 3 SPRING 2018 EDITOR S NOTE Bruce J. McNeil ADMINISTRATION MAKES THE PLAN Bruce J. McNeil PREMIUM INTEREST TAX FOR 409A FAILURES Ronald Gerard, Richard Hardeman, and Lee Nunn RISK OF A NONQUALIFIED PLAN Bruce J. McNeil NONQUALIFIED DEFERRED COMPENSATION REPORTING AND WITHHOLDING Ronald Gerard, Elizabeth Groenewegen, and Lee Nunn 10041436-0050

Premium Interest Tax for 409A Failures RONALD GERARD, RICHARD HARDEMAN, AND LEE NUNN Ronald Gerard is a partner, Richard Hardeman is an analyst, and Lee Nunn is a senior vice president at Aon Hewitt. They may be reached at ron.gerard@aon.com, richard.hardeman@aon.com, and lee.nunn@aon.com, respectively. BACKGROUND AND INTRODUCTION Deferred compensation that falls within the scope of Section 409A of the Internal Revenue Code (IRC) is subject to strict compliance guidelines. When amounts deferred under Section 409A fall out of compliance, the amounts can be subject to taxes, penalties, and reporting requirements. The IRS has established limited relief for certain qualifying failures (see Notice 2008-113 and Notice 2010-6 below). When relief is not available, taxes and penalties include aggregation of the total amount deferred for all taxable years for early inclusion of the deferrals in income, 1 an additional 20% tax, 2 and a premium interest tax. 3 Both the 20% tax and the premium interest tax are additional income taxes, not an excise tax or interest on an underpayment. 4 Therefore, if the taxes are being paid in a tax year after the tax year of the failure, underpayment interest is required to reflect the late payment of taxes. This article addresses the premium interest tax beginning with the identification of amounts subject to premium interest tax as well as the calculation of the premium interest tax and underpayment interest. This article will focus on and use terminology consistent with that applicable to nonaccount balance plans; however, the methodology is identical for account balance plans. NOTICE 2008-113 AND NOTICE 2010-6 The IRS established limited relief for operational failures and document failures with the publication of Notice 2008-113 5 and Notice 2010-6, 6 respectively. Notice 2008-113 provides four categories of relief for operational failures: same year corrections, next year corrections, limited amount corrections, and corrections of other 30

PREMIUM INTEREST TAX FOR 409A FAILURES / 31 operational failures. 7 These categories generally require correction of failures occurring in the current and previous two tax years. 8 Notice 2008-113 provides relief from the Section 409A aggregation rules by limiting the inclusion to the amount of the failure and by waiving the premium interest tax. Operational failures that occur outside the correction periods provided by Notice 2008-113 or that are not corrected in accordance with all of the requirements of the Notice are subject to the full scope of Section 409A taxes. Notice 2010-6 provides specific relief for various plan document failures. This article will focus on operational failures that are outside the scope of Notice 2008-113. AGGREGATION AND EARLY INCLUSION OF INCOME The amount of income to be included early and taxed after a failure is not limited to the amount of the failure. Section 409A aggregates the total amount deferred within the category of benefit of the failed amount, to the extent not subject to a substantial risk of forfeiture and not previously included in income. 9 In other words, a $1 failure can cause a total amount deferred of $1 million to be subject to early inclusion in income and incur basic income tax, the additional 20% tax, and premium interest tax. Example: Jordan works for ACME Inc. and has accrued benefits for the last 10 years under a defined contribution nonqualified deferred compensation plan (DCP) with an employer match and a supplemental executive retirement plan (SERP) that credits a percentage of pay. During year 11, the SERP falls out of compliance with Section 409A. Because the SERP and the employer match to the DCP are both employer contributions to an account balance plan, they are treated as if they were one plan for the purposes of determining the amount includible in income under Section 409A. 10 The vested total amount deferred of the employer match and the SERP is calculated as of December 31st of year 11 and included in income. 11 To the extent that any amount of employer contributions in the plan becomes vested over the course of year 11, regardless of whether they vest before or after the date on which the plan falls out of compliance, they are includible in income under Section 409A. 12

32 / JOURNAL OF DEFERRED COMPENSATION PREMIUM INTEREST TAX IRC Section 409A and Proposed Treasury Regulations established premium interest tax as an additional income tax on Section 409A failures. 13, 14 The purpose of the tax is to retroactively disqualify deferrals from having received tax-deferred status without causing an extreme administrative burden on plan sponsors or participants. 15 Premium interest tax is the most complicated income tax associated with a Section 409A failure, but the complexity helps minimize the tax by considering only the total amount deferred in the year of the failure and allocating any losses incurred, payments made, or previously taxed amounts to the earliest years in the plan history. 16 The calculation of premium interest tax requires allocating the yearend vested total amount deferred in the year of the failure back to years in which amounts were first deferred and vested under the plan. The year-end values are used to find incremental deferrals, which in turn create hypothetical income in every year in which there was a vested amount deferred under the plan. Hypothetical income creates a hypothetical tax underpayment which is used to calculate the premium interest tax in a manner analogous to that used to determine underpayment interest. Amounts deferred prior to 2005 17 and amounts deferred and vested in the year of the failure 18 are not subject to premium interest tax. This article will describe a comprehensive list of steps used to calculate premium interest tax as well as explore common issues with each step. CASE STUDY A case study is provided in each section that will follow the steps laid out in this article. The case study illustrates the following hypothetical failure: Incorrect payment of a benefit accrued under a nonaccount balance deferred compensation plan in the amount of $800,000 on December 30, 2014 during a required six-month delay for a specified employee. The specified employee terminated on December 1, 2014, and the payment should have been made on May 1, 2015. The failure year was 2014 and the current year is 2017. The participant elected a lump-sum option. Both the plan year and the tax year are assumed to be the calendar year. The first year in which an amount deferred under the plan was not subject to a substantial risk of forfeiture was 2007. The total amount deferred on December 31, 2014 is $0 as a result of the payment on December 30, 2014. The participant s marginal federal income tax rate was the highest bracket for all years in question. A year by year history of the total amount deferred is provided below:

PREMIUM INTEREST TAX FOR 409A FAILURES / 33 Tax Year 2007** 2008** 2009** 2010** 2011** 12/31 Total Amount Deferred $100,000 $200,000 $300,000 $200,000* $500,000 Tax Year 2012** 2013** 2014*** 12/31 Total Amount Deferred $600,000 $700,000 $0 *The $100,000 decrease is due to an increase in the discount rate **Plan is accruing benefits *** Failure year SUMMARY OF STEPS TO CALCULATE PREMIUM INTEREST TAX AND UNDERPAYMENT INTEREST Below is a high level list of steps to follow when calculating premium interest tax and underpayment interest: 1. Identify the failure year(s). 2. Adjust year-end vested total amount deferred in the failure year(s). 19 3. Allocate the vested total amount deferred back to the years in which those amounts were first deferred and vested. 20 a. Identify payments and decreases in the actuarial present value or other decreases to the total amount deferred. b. Allocate payments decreases in the actuarial present value or other decreases to the total amount deferred back to the earliest year there was a vested balance under the plan. 4. Subtract out prior year s year-end vested total amount deferred as well as amounts previously included in income for years prior to the failure year. 21 5. Calculate the hypothetical underpayment of taxes as a result of treating Section 409A income as cash compensation on the participant s tax return during the year the income was first deferred. 22 6. Use the annual hypothetical underpayment of tax to calculate the amount of premium interest tax due in the failure year using the IRC Section 6621 rate increased by one percent. 23

34 / JOURNAL OF DEFERRED COMPENSATION 7. Calculate the amount of underpayment interest due in the current tax year caused by the late payment of premium interest tax due in the year of the failure using IRC Section 6601. Step 1: Identify the failure year(s) Determining the failure year is not always intuitive. Failures with only one component are more easily identified. Consider a lump-sum payment that was supposed to have been paid in 2011 but was never paid. The failure is without a doubt the missed payment in 2011. Now consider the same payment that was supposed to have been paid as a lump sum in 2011, but was paid instead as four installments from 2011 to 2014. The missed lump sum (and payment of the first installment) creates a deferral failure. The three installments paid from 2012 to 2014 are failures because they are not consistent with the plan document s payment provision based on the participant s election. In the context of premium interest tax, multiple failures do not necessarily need more than one premium interest tax calculation. Consider the installments-rather than-lump-sum example. There are four failures between 2011 and 2014, but premium interest tax will only need to be calculated for the 2011 failure. The difference between the year-end vested total amount deferred for 2011 and 2012 will be only what was deferred and vested in 2012. Because premium interest tax calculations are only necessary for a year in which there is a Section 409A failure and the year-end vested total amount deferred contains untaxed deferrals from prior years, 24 there will not be a calculation for 2012. The same would be true for 2013 and 2014. If the example was revised so that a failure occurred in 2011, 2013, and 2014, but not in 2012, a premium interest tax calculation could be needed in 2013 to capture any untaxed deferrals or investment gain from 2012. Other issues can affect taxation under 409A. The section entitled Developing Issues below briefly discusses some of these issues. Case Study Example 1: The failure occurred in 2014 with the payment of $800,000 during a required six-month delay period. The $800,000 total amount deferred at the end of 2014 must be aggregated with any benefit in the same category and taxed for income tax, the additional 20% tax, and premium interest tax. Step 2: Adjust year-end vested total amount deferred in the failure year(s) Once the failure year(s) has been identified, the year-end vested total amount deferred will need to be adjusted. The IRS treats any payments made during the failure year as still deferred under the plan. 25

PREMIUM INTEREST TAX FOR 409A FAILURES / 35 Any amounts previously included in income are deducted from the year-end vested total amount deferred. 26 The adjusted year-end vested total amount deferred is the amount of income that must be allocated to prior years in which income was first deferred and vested under the plan. 27 A portion of the year-end balance may also be deferred and vested in the year of the failure and exempt from premium interest tax because tax on amounts deferred or vested in the year of the failure would not have been due until the participant filed their tax return in April of the year following the year of the failure. 28 Amounts taxed as a result of previous failures are treated as amounts previously included in income for any subsequent years. 29 Case Study Example 2: The payment of $800,000 (the total accrued benefit) was made on December 30, 2014 and must be included in the year-end vested total amount deferred. The $800,000 total amount deferred will be included in 2014 taxable income. Tax Year 2014 12/31 Total Amount Deferred $0 Add Payments $800,000 Subtract Amounts Previously Included` $0 Amount to be Allocated Among Failure Year and Prior Years $800,000 The 2014 year-end balance contains amounts deferred and vested since 2007. The $800,000 incorrectly paid in 2014 needs to be allocated to the deferrals made and vested between 2007 and 2014. Step 3: Allocate the adjusted vested total amount deferred back to the years in which those amounts were first deferred and vested. The year-end vested total amount deferred in the year of the failure is a combination of service and/or compensation credits, changes in the present value due to actuarial assumption, and payments attributable to prior years. To recognize that deferred amount from prior years should not have been eligible for deferred tax status, amounts still deferred under the plan in the failure year are allocated back to the year first deferred for hypothetical income inclusion. 30 This process, while complex, reduces the year-end vested total amount deferred in the earliest years first, which results in the most taxpayer-friendly approach to calculating premium interest tax. Determine the year-end vested total amount deferred for every year prior to the failure year in which an amount was deferred under the plan. Treat any balance prior to 2005 as zero. 31 Do not add payments made during years prior to the failure back into the total

36 / JOURNAL OF DEFERRED COMPENSATION amount deferred for those years and do not exclude previously included amounts. 32 Identify any payments made under the plan. 33 Identify any decreases in the actuarial present value or other net decreases in the total amount deferred. 34 For years with payments, decreases in the actuarial present value, or other net decreases in the total amount deferred, subtract the decrease from all prior years with a vested total amount deferred. 35 Do not subtract the decrease from the year in which it occurs as it is already accounted for in the year-end total amount deferred. 36 Do not reduce any year s total amount deferred below zero. 37 Decreases in the actuarial present value and other net decreases in the year of the failure are allocated back to earlier years. 38 Payments in the year of the failure are not allocated back to earlier years. 39 Case Study Example 3: The year-end total amount deferred for all years prior to the 2014 failure in which an amount was deferred under the plan: Tax Year 2007 2008 2009 2010 2011 Year-End Vested Total Amount $100,000 $200,000 $300,000 $200,000 $500,000 Deferred Tax Year 2012 2013 2014 Year-End Vested Total Amount Deferred $600,000 $700,000 N/A Payments, decreases in the actuarial present value, and other net decreases in the total amount deferred: Tax Year 2007 2008 2009 2010 Payments $0 $0 $0 $0 Decreases in the Actuarial Present Value $0 $0 $0 $100,000 Other Net Decreases $0 $0 $0 $0 Tax Year 2011 2012 2013 2014 Payments $0 $0 $0 N/A Decreases in the Actuarial Present Value $0 $0 $0 $0 Other Net Decreases $0 $0 $0 $0 In this situation, there are no payments and no net other decreases in the total amount deferred, but there is a $100,000 decrease in the actuarial present value in 2010. The remaining amount deferred would be equal to the incremental deferrals. The calculation of the remaining amount deferred would be as follows:

PREMIUM INTEREST TAX FOR 409A FAILURES / 37 Tax Year 2007 2008 2009 2010 Year-End Vested Total $100,000 $200,000 $300,000 $200,000 Amount Deferred Payments $0 $0 $0 $0 Decrease in the Actuarial $100,000 $100,000 $100,000 $0 Present Value Other Net Decreases $0 $0 $0 $0 Remaining Amount Deferred $0 $100,000 $200,000 $200,000 Tax Year 2011 2012 2013 2014 Year-End Vested Total $500,000 $600,000 $700,000 N/A Amount Deferred Payments $0 $0 $0 N/A Decrease in the Actuarial $0 $0 $0 $0 Present Value Other Net Decreases $0 $0 $0 $0 Remaining Amount Deferred $500,000 $600,000 $700,000 N/A Step 4: Subtract out prior year s year-end vested total amount deferred as well as amounts previously included in income for years prior to the failure year. The remaining amount deferred for each year represents the yearend total amount deferred for each year considering only amounts still deferred under the plan in the failure year. With the remaining amount deferred calculated for each year, the incremental deferral for each year can be calculated by subtracting out the prior year s remaining amount deferred from the remaining amount deferred in the subsequent year. 40 Once the incremental deferral is calculated, the amount deferred for premium interest for each year can be calculated by subtracting out amounts previously included in income beginning in the earliest year with an incremental deferral. 41 Amounts previously included in income reduce the incremental deferral in the first year until it is zero. 42 If the amount previously included in income is greater than the first year s incremental deferral, decrease the incremental deferral in the second year and so on until the amount previously included in income is reduced to zero. 43 Do not reduce any amount below zero. 44 Case Study Example 4: There have been no amounts previously included in income under the plan. The calculations to get the amount deferred for premium interest are as follows:

38 / JOURNAL OF DEFERRED COMPENSATION Tax Year 2007 2008 2009 2010 2011 Remaining Amount Deferred $0 $100,000 $200,000 $200,000 $500,000 Remaining Amount Deferred for Prior Year $0 $0 $100,000 $200,000 $200,000 Incremental Deferral $0 $100,000 $100,000 $0 $300,000 Previously Included Income $0 $0 $0 $0 $0 Amount Deferred for $0 $100,000 $100,000 $0 $300,000 Premium Interest Tax Year 2012 2013 2014 Remaining Amount Deferred $600,000 $700,000 N/A Remaining Amount $500,000 $600,000 N/A Deferred for Prior Year Incremental Deferral $100,000 $100,000 N/A Previously Included Income $0 $0 N/A Amount Deferred for Premium Interest $100,000 $100,000 N/A The 2014 vested total amount deferred including payments is $800,000. Of that, $700,000 is allocated to earlier years for the purposes of premium interest and $100,000 is deemed deferred and vested in the year of the failure, making it exempt from premium interest tax. Step 5: Calculate the hypothetical underpayment of taxes as a result of treating Section 409A income as cash compensation on the participant s tax return during the year the income was first deferred. The amount deferred for premium interest is hypothetical income that needs to be included on a participant s tax return for the year in which it was deferred. 45 The inclusion of the hypothetical income creates a hypothetical tax underpayment. The hypothetical tax underpayment represents the taxes the participant would have paid if not for the deferral and will be the basis for calculating the premium interest tax. To accomplish this, the participant or his or her tax preparer would need to complete a with-and-without calculation of their taxes with the hypothetical underpayment beginning in the first year there is an underpayment and continuing through every year with a hypothetical underpayment. This process can involve much more than just changes in the participants tax bracket. Additional income could affect charitable contribution deductions that exceed the adjusted gross income percent limitations and result in a carry over to the next tax year. Other examples include personal exemption phase-outs, itemized deduction limitations, and the alternative minimum tax. A possible safe harbor is using the year s highest marginal income tax rate to determine any tax underpayment. Participants and employers will have to weigh whether the administrative cost of looking back at every old tax return affected is more burdensome than the possibility of overpaying premium interest tax.

PREMIUM INTEREST TAX FOR 409A FAILURES / 39 Case Study Example 5: We will assume that the highest marginal tax rate is applied in all years to amounts deferred for premium interest. The highest marginal rate results in the following hypothetical tax underpayments: Tax Year 2007 2008 2009 2010 Amounts Deferred for Premium Interest $0 $100,000 $100,000 $0 Marginal Tax Rate 35% 35% 35% 35% Tax Underpayment $0 $35,000 $35,000 $0 Tax Year 2011 2012 2013 Amounts Deferred for Premium Interest $300,000 $100,000 $100,000 Marginal Tax Rate 35% 35% 39.60% Tax Underpayment $105,000 $35,000 $39,600 Step 6: Use the annual hypothetical underpayment of tax to calculate the amount of premium interest tax due in the failure year using the IRC Section 6621 rate increased by one percent. This step calculates the premium interest tax due in the year of the failure in a manner analogous to the calculation of underpayment interest. Beginning in the first year with a hypothetical tax underpayment, calculate the premium interest tax by multiplying the hypothetical tax underpayment times the quarterly IRC Section 6621 underpayment rate increased by one percent compounded daily. 46 The calculation should begin on January 1 47, 48 of the year following the year in which the hypothetical tax underpayment occurred and end on December 31 of the failure year. 49 Complete this calculation for every year prior to the failure year in which there was a hypothetical tax underpayment. To compound daily, multiply the tax underpayment by one percent plus the underpayment rate for that quarter divided by 365 (366 for a leap year). 50 For example, if the tax underpayment on the first day of 2015 was $100 and the underpayment rate for the first quarter of 2015 was 3%, the calculation for one day of premium interest would be ($100*(1+(4%/365))) - $100 or $0.01. To complete this calculation quarterly, the calculation would be ($100*(1+(4%/365)) 90 ) - $100 or $0.99. 90 is the exponent because there are 90 days in the first quarter of 2015. The unpaid tax basis for the second quarter of 2016 would be $100.99. Case Study Example 6: The first year with a hypothetical underpayment is 2008. The hypothetical tax underpayment of $35,000 will be multiplied by the quarterly underpayment rates compounded daily from January 1, 2009 until December 31, 2014. Because of the complexity of this part of the calculation, the numerical example will be shown in the appendix and will only show how to calculate premium interest on the hypothetical tax underpayment in 2008. The premium interest tax on the hypothetical tax underpayments in 2009, 2011, 2012, and 2013 would be calculated in the same way.

40 / JOURNAL OF DEFERRED COMPENSATION The following table shows premium interest tax attributable to each tax year in which there was a hypothetical underpayment. This is for reference only; all $37,045.08 of premium interest tax is due in 2014 (the year of the failure). Tax Year 2008 2009 2010 2011 2012 2013 Premium Interest Attributable per Year $10,732.59 $8,395.22 $0 $13,386.38 $2,914.87 $1,616.02 Step 7: Calculate the amount of regular underpayment interest due in the current tax year caused by the late payment of premium interest tax due in the year of the failure using IRC Section 6601. The previous steps have all resulted in a tax that should have been paid in the year of the failure. If the failure year is the current tax year, no regular underpayment is due. 51 If the failure year is an earlier tax year than the current year, a penalty is assessed on the premium interest tax following the underpayment guidelines in IRC Section 6601 to reflect the late payment of tax. Most failures that incur premium interest tax will not be in the current tax year, as Notice 2008-113 gives relief to most same year corrections. The process for the underpayment interest calculation is similar to the premium interest tax calculation. The process differs in that the rate is the IRC Section 6621 rate without adding one percent and the underpayment interest continues until premium interest tax is paid in the current tax year, not December 31. 52 Case Study Example 7: The premium interest due in 2014 creates a tax underpayment which results in underpayment interest due in 2017. Beginning January 1, 2015, multiply the $37,045.08 underpayment times the quarterly Section 6621 rates compounded daily until paid. This example assumes payment on 6/30/2017. The calculation is provided in the appendix and results in total underpayment interest of $3,381.24 due on 6/30/2017. DEVELOPING ISSUES Proposed Treasury Regulations leave several issues open to interpretation. Chief among these are taxation of Section 409A failures in closed tax years, and the treatment of a series of payments. This section will discuss both issues. An additional complication of Section 409A failures is determining if the failure occurred in an open or closed tax year. In general, the last three years are open years. 53 For example, 2014 closes on April 15,

PREMIUM INTEREST TAX FOR 409A FAILURES / 41 2018. If the misstatement of gross income exceeds 25% of gross income reported, any of the last six years can be open tax years. 54 If fraud is involved, there is no limitation on the look-back period. 55 Determining what years are open and closed is important in determining the years in which amounts are to be included in income under Section 409A. Because of the lack of formal guidance, several theories have emerged. The most aggressive theories claim that a failure in a closed tax year falls outside the scope of Section 409A taxes. For example, if an amount of deferred compensation was scheduled to be paid in 2013, and 2013 is a closed tax year, this theory would support including the amount in the earliest open tax year or the current tax year. The employer would report the amount on Form W-2 (or W-2c) in box 1 only (assuming FICA tax has been paid) and the employee would pay no 409A penalty tax. More conservative theories say that failures in closed tax years roll over into open tax years. In other words, you can t unintentionally wait your way out of a failure. A complete discussion of the treatment of failures in closed tax years is beyond the scope of this article. Certain portions of the Section 409A regulations treat a series of payments as a single payment. Examples include subsequent changes in the time and form of payment, 56 the anti-acceleration provision, 57 and the short term deferral rule. 58 Competing theories have emerged over whether this treatment extends to Section 409A failures. The more aggressive position says that a series is treated as one payment in the context of Section 409A failures. This implies that a series can t have multiple failures. The more conservative position is that anything that is not consistent with the plan document s payment provision constitutes a 409A failure. A complete discussion of the treatment of a series of payments in the context of Section 409A failures is outside the scope of this article. SUMMARY Section 409A failures come with a hefty price tag. While the pain of early inclusion in income and the 20% penalty tax can seem more significant on the surface, the allocation of the total amount deferred back to years without a substantial risk of forfeiture can dramatically affect the impact of premium interest tax on the overall penalties paid. Additionally, the complexity of calculating a participant s premium interest tax after a failure can make it the most onerous part of correcting a Section 409A failure. The purpose of the tax is to recognize that deferrals made under the failing plan should not have received the benefit of delayed tax inclusion. The steps in this article follow the methodology of the Proposed Treasury Regulations to lay out a comprehensive guide for determining the premium interest tax for a Section 409A failure.

42 / JOURNAL OF DEFERRED COMPENSATION APPENDIX Step 6 calculation Year 2009 2009 2009 2009 2010 2010 2010 2010 Quarter 1 2 3 4 1 2 3 4 Underpayment (U) $35,000 $35,521.61 $35,967.16 $36,423.28 $36,885.19 $37,342.72 $37,811.10 $38,290.61 6621 Rate 5% 4% 4% 4% 4% 4% 4% 4% Rate For Premium Interest (I) 6% 5% 5% 5% 5% 5% 5% 5% Number of Days Per Quarter (N) 90 91 92 92 90 91 92 92 Days in the Year (D) 365 365 365 365 365 365 365 365 Underpayment Multiplier (1+(I/D)) N 1.0149 1.0125 1.0127 1.0127 1.0124 1.0125 1.0127 1.0127 Premium Interest Tax (U(1+(I/D)) N )-U $521.61 $445.54 $456.12 $461.91 $457.53 $468.39 $479.51 $485.59 Year 2011 2011 2011 2011 2012 2012 2012 2012 Quarter 1 2 3 4 1 2 3 4 Underpayment (U) $38,776.20 $39,160.52 $39,160.52 $40,154.55 $40,561.42 $40,966.81 $41,376.25 $41,794.35 6621 Rate 3% 4% 4% 3% 3% 3% 3% 3% Rate For Premium Interest (I) 4% 5% 5% 4% 4% 4% 4% 4% Number of Days Per Quarter (N) 90 91 92 92 91 91 92 92 Days in the Year (D) 365 365 365 365 366 366 366 366 Underpayment Multiplier (1+(I/D)) N 1.0099 1.0125 1.0127 1.0101 1.0100 1.0100 1.0101 1.0101 Premium Interest Tax (U(1+(I/D)) N )-U $384.32 $491.19 $502.85 $406.87 $405.39 $409.44 $418.10 $422.32

PREMIUM INTEREST TAX FOR 409A FAILURES / 43 Year 2013 2013 2013 2013 2014 2014 2014 2014 Quarter 1 2 3 4 1 2 3 4 Underpayment (U) $42,216.68 $42,635.10 $43,062.38 $43,498.72 $43,939.47 $44,374.97 $44,819.69 $45,273.84 6621 Rate 3% 3% 3% 3% 3% 3% 3% 3% Rate For Premium Interest (I) 4% 4% 4% 4% 4%% 4% 4% 4% Number of Days Per Quarter (N) 90 91 92 92 90 91 92 92 Days in the Year (D) 365 365 365 365 365 365 365 365 Underpayment Multiplier (1+(I/D)) N 1.0099 1.0100 1.0101 1.0101 1.0099 1.0100 1.0101 1.0101 Premium Interest Tax (U(1+(I/D)) N )-U $418.42 $427.29 $436.34 $440.76 $435.50 $444.72 $454.14 $458.74 Step 7 Calculation Tax Year 2015 2015 2015 2015 2016 2016 2016 2016 2017 2017 Quarter 1 2 3 4 1 2 3 4 1 2 Underpayment (U) $37,405.07 $37,320.11 $37,600.28 $37,885.66 $38,173.22 $38,459.00 $38,843.38 $39,235.88 $39,632.36 $40,025.16 6621 Rate (I) 3% 3% 3% 3% 3% 4% 4% 4% 4% 4% Days Per Quarter (N) 90 91 92 92 90 91 92 92 90 91 Days in the Year (D) 365 365 365 366 366 366 366 366 365 365 Underpayment 1.0074 1.0075 1.0076 1.0076 1.0075 1.0100 1.0101 1.0101 1.0099 1.0100 Multiplier (1+(I/D)) N Underpayment Interest (U(1+(I/D)) N )-U $275.07 $280.18 $285.36 $287.56 $285.78 $384.36 $392.52 $396.47 $392.80 $401.14

44 / JOURNAL OF DEFERRED COMPENSATION NOTES 1. I.R.C. 409A(a)(1)(A). 2. I.R.C. 409A(a)(1)(B)(i)(II). 3. I.R.C. 409A(a)(1)(B)(i)(I),(ii). 4. Preamble to Proposed Treasury Regulation 1.409A-4, IV, V(A) 73 Fed. Reg. 74389; Proposed Treasury Regulations 1.409A-4(c), (d)(1) (December 8, 2008). 5. 2008-2 C.B. 1305 (December 5, 2008). 6. 2010-3 I.R.B. 275 (January 1, 2010). 7. IRS Notice 2008-113 Sections IV, V, VI, and VII. 8. IRS Notice 2008-113 Sections IV, V, VI, and VII. 9. Proposed Treas. Reg. 1.409A-4(f)(2) 73 Fed. Reg. 74402. 10. Treas. Reg. 1.409A-1(c)(2)(i)(B). 11. Preamble to Proposed Treas. Reg. 1.409A-4, III(B)(1) 73 Fed. Reg. 74382; Proposed Treas. Reg. 1.409A-4(b)(2)(i). 12. Chief Counsel Advice 2015-18-013 (May 1, 2015). 13. I.R.C. 409A(a)(1)(B)(i)(I),(ii). 14. See n.4, supra. 15. Olshan, Schohn; Section 409A Handbook, Chapter 28, Section V. 16. Proposed Treas. Reg. 1.409A-4(d)(2)(i)(A)-(D) 73 Fed. Reg. 74399, 74400. 17. Proposed Treas. Reg. 1.409A-4(d)(2)(i)(A) 73 Fed. Reg. 74399. 18. Proposed Treas. Reg. 1.409A-4(d)(3)(ii), Ex.1 73 Fed. Reg. 74401. 19. Preamble to Proposed Treas. Reg. 1.409A-4, III(A) 73 Fed. Reg. 74382. 20. Proposed Treas. Reg. 1.409A-4(d)(2)(i) 73 Fed. Reg. 744399. 21. Proposed Treas. Reg. 1.409A-4(d)(2)(i) 73 Fed. Reg. 744399. 22. Proposed Treas. Reg. 1.409A-4(d)(3)(i) 73 Fed. Reg. 74401. 23. Proposed Treas. Reg. 1.409A-4(d)(4)(i) 73 Fed. Reg. 74402. 24. Proposed Treas. Reg. 1.409A-4(d)(1) 73 Fed. Reg. 74399. 25. Preamble to Proposed Treas. Reg. 1.409A-4, III(B)(2) 73 Fed. Reg. 74382; Proposed Treas. Reg. 1.409A-4(b)(2)(i) 73 Fed. Reg. 74395. 26. Preamble to Proposed Treas. Reg. 1.409A-4, III(A) 73 Fed. Reg. 74382; Proposed Treas. Reg. 1.409A-4(a)(1)(i)(B) 73 Fed. Reg. 74393. 27. Preamble to Proposed Treas. Reg. 1.409A-4, V(C) 73 Fed. Reg. 74389; Proposed Treas. Reg. 1.409A-4(d)(1) 73 Fed. Reg. 74399. 28. Proposed Treas. Reg. 1.409A-4(d)(3)(ii) Ex. 1 73 Fed. Reg. 74401. 29. Preamble to Proposed Treas. Reg. 1.409A-4, III(F) 73 Fed. Reg. 74388; Proposed Treas. Reg. 1.409A-4(a)(1)(ii)(A) 73 Fed. Reg. 74393. 30. Proposed Treas. Reg. 1.409A-4(d)(2)(i)(D) 73 Fed. Reg. 74399, 74400. 31. Proposed Treas. Reg. 1.409A-4(d)(2)(i)(F) 73 Fed. Reg. 74400. 32. Proposed Treas. Reg. 1.409A-4(d)(2)(i)(A) 73 Fed. Reg. 74399. 33. Proposed Treas. Reg. 1.409A-4(d)(2)(i)(B) 73 Fed. Reg. 74399. 34. Proposed Treas. Reg. 1.409A-4(d)(2)(i)(C) 73 Fed. Reg. 74399. 35. Proposed Treas. Reg. 1.409A-4(d)(2)(i)(D) 73 Fed. Reg. 74399, 74400.

PREMIUM INTEREST TAX FOR 409A FAILURES / 45 36. Proposed Treas. Reg. 1.409A-4(d)(2)(i)(D) 73 Fed. Reg. 74399, 74400. 37. Proposed Treas. Reg. 1.409A-4(d)(2)(i)(D) 73 Fed. Reg. 74399, 74400. 38. Proposed Treas. Reg. 1.409A-4(d)(2)(i)(D) 73 Fed. Reg. 74399, 74400. 39. Proposed Treas. Reg. 1.409A-4(d)(2)(i)(B) 73 Fed. Reg. 74399. 40. Proposed Treas. Reg. 1.409A-4(d)(2)(i)(F) 73 Fed. Reg. 74400. 41. Proposed Treas. Reg. 1.409A-4(d)(2)(i)(H) 73 Fed. Reg. 74400. 42. Proposed Treas. Reg. 1.409A-4(d)(2)(i)(H) 73 Fed. Reg. 74400. 43. Proposed Treas. Reg. 1.409A-4(d)(2)(i)(H) 73 Fed. Reg. 74400. 44. Proposed Treas. Reg. 1.409A-4(d)(2)(i)(H) 73 Fed. Reg. 74400. 45. Proposed Treas. Reg. 1.409A-4(d)(3)(i) 73 Fed. Reg. 74401. 46. Proposed Treas. Reg. 1.409A-4(d)(4)(i) 73 Fed. Reg. 74402. 47. I.R.C. 6601(b)(5). 48. Preamble to Proposed Treas. Reg. 1.409A-4, III(B)(1) 73 Fed. Reg. 74382; Proposed Treas. Reg. 1.409A-4(d)(4)(i) 73 Fed. Reg. 74402. 49. Proposed Treas. Reg. 1.409A-4(d)(4)(ii), Ex 1 73 Fed. Reg. 74402. 50. Treas. Reg. 301.6622-1(a). 51. Proposed Treas. Reg. 1.409A-4(d)(3)(ii), Ex. 1 73 Fed. Reg. 74401. 52. I.R.C. 6601(a). 53. I.R.C. 6501(a). 54. I.R.C. 6501(e)(1)(A). 55. I.R.C. 6020(b), 6501(b)(3), 6501(c)(1). 56. Treas. Reg. 1.409A-2(b)(2)(iii). 57. Treas. Reg. 1.409A-2(b)(5). 58. Treas. Reg. 1.409A-1(b)(4)(i)(F).