Section 409A compliance involves adhering to Internal Revenue Code Section 409A rules that govern nonqualified deferred compensation plans. Section 409A imposes strict requirements on the timing of deferral elections, distribution events, funding arrangements, and plan documentation. Violations can result in immediate taxation of deferred amounts, a 20 percent additional tax, and interest penalties for affected participants. In the insurance context, Section 409A compliance affects executive deferred compensation plans, supplemental retirement arrangements, and certain split-dollar or SERP designs that promise future benefits beyond current taxable compensation.

Attorneys, CPAs, and benefits consultants review Section 409A compliance when designing or auditing nonqualified plans that may use life insurance as an informal funding vehicle. They ensure that deferral elections are made on time, that permissible payment triggers-such as separation from service, disability, or a fixed date-are clearly defined, and that changes to distribution schedules meet 409A rules. Advisors proposing executive benefit programs coordinate with legal counsel to avoid inadvertent 409A issues and to explain potential penalties to employers and executives. Understanding Section 409A compliance helps advisors position life insurance-based supplemental retirement strategies within a legally sound framework, avoiding costly tax surprises for key people.