IRS Issues Additional Transition Relief Under Code Section 409A
By Jean H. Bender
On October 22, 2007, the Internal Revenue Service issued Notice 2007-86 which generally extends to December 31, 2008 previous transition relief that was scheduled to expire on December 31, 2007. Section 409A was added to the Internal Revenue Code in October 2004. It made extensive changes to the treatment of deferred compensation arrangements. Under the final regulations, the definition of such covered arrangements is exceedingly broad, and includes bonus, severance, or deferred payment arrangements, certain employment agreements, stock appreciation rights, phantom stock, certain stock options, director’s fee deferral programs, supplemental retirement income plans, and other similar arrangements. Any agreement subject to Section 409A must be carefully structured to comply with the extensive rules now governing elections to defer compensation, the time and form of payment of that compensation, and how and when payments can be further deferred.
Effective January 1, 2005, all arrangements subject to Code Section 409A were required to operate in good faith compliance with the new law. Beginning January 1, 2009, full documentary and operational compliance with the detailed rules will be required. The consequences for failure to comply with these rules are significant. Amounts deferred under a covered arrangement that do not comply with 409A are subject to current income tax, interest, and a 20% excise tax.
Notice 2007-86 also generally extends to the transition relief which allows participants or companies to make new elections (subject to certain limitation) for previously deferred compensation as to both the time and form of payment. Payment elections made during 2008 can only apply to amounts payable in 2009 or later and cannot accelerate a payment into 2008 that otherwise would have been paid in a future year. Therefore new payment elections with respect to amounts otherwise payable in 2008 or to accelerate payment into 2008 that would otherwise be paid in a future year still need to be made by December 31, 2007.
It is critical that all compensation plans be reviewed for compliance with Code Section 409A. While the requirement to amend such plans and agreements to come into compliance with Section 409A has now been extended until the end of 2008, we continue to recommend our clients identify and amend such plans and agreements as soon as possible. Having properly amended plans and agreements will assist everyone in operationally complying with these complex rules. Davenport Evans can assist you with reviewing your plans or deferred compensation practices for compliance with these new rules, address design and/or operational changes, review options available, and document the plan. Please contact Robert Thomas or Jean Bender if you have any questions about the impact of Section 409A on your deferred compensation arrangements.