IRS Grants Welcome Relief to School Districts
2007-08/20 Mary Ellen Schill

The IRS recently issued a press release assuring school districts that the recent changes to IRS regulations affecting deferred compensation programs will not impact the way teachers’ or school employees' pay is taxed during the 2007-2008 school year.  A common practice of allowing school district employees to make an annual "election" to have their 9 months of salary paid over a 12-month period was called into question with the issuance of final regulations under Internal Revenue Code Section 409A back in April. 

 First, the IRS clarified that the new deferred compensation rules do not require school districts to offer teachers the annualized election of a 12-month pay period.  Therefore, school districts that have not been offering teachers this option are not required to start.  However, school districts that do offer the annualized election may have to make some minor changes to meet the Code Section 409A requirements.  These requirements generally include: that the employee notify the district of his or her election in writing or electronically before the beginning of the school year; that the election is irrevocable (it cannot be changed after the work period begins); and the election must state how the compensation is going to be paid if the election is made (meaning that the district must establish in writing a "default" method of paying salary).  If the Code Section 409A requirements are not met, the compensation is subject to an additional 20% income tax.

 The new rules will not be applied to elections for school years beginning before Jan. 1, 2008, so school districts will not have to make any changes for the 2007 school year.  However, by the 2008 school year, school districts that offer annualized elections must document in writing how teachers and school employees are to be paid for the compensation earned for the remainder of the school year, and the districts must have in place a proper procedure to meet the Code Section 409A requirements.  Districts must describe the annualized election program in a written document which includes all of the Code Section 409A requirements.

 It is important to note that a district which pays all 9-month employees over a 12-month period (i.e. does not offer an election to annualize) does not have to comply with Code Section 409A, since there is no election to actually defer compensation being offered.

 This alert was prepared by Attorney Mary Ellen Schill.  Please direct your questions regarding the content of this alert to any of the attorneys within the Employment, Labor & Benefits Practice Group:  Ron Rutlin, Dean Dietrich, Jeff Jones, Mary Ellen Schill, Chris Toner, or Sara Ackermann.  Thank you.

© 2007 Ruder Ware, L.L.S.C. Accurate reproduction with acknowledgment granted. All rights reserved.
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