October 10, 2007
On September 10, 2007, the IRS announced in Notice 2007-78 that the deadline for amending nonqualified deferred compensation plans to comply with the Section 409A requirements has been extended by one year, to December 31, 2008. However, the extension is not available for all Section 409A amendments and it generally does not apply to the limited Section 409A transition relief available in 2007. Employers and executives who would like to take advantage of the transition relief provisions must do so before the end of the year. In addition, irreversible design decisions and certain plan documentation amendments must still be completed in 2007.
Section 409A was added to the Internal Revenue Code effective January 1, 2005, and imposes significant restrictions on executive and deferred compensation arrangements. The final Section 409A regulations, issued on April 17, 2007, required that all nonqualified deferred compensation plans be amended to comply with Section 409A no later than December 31, 2007. With certain important exceptions discussed below, IRS Notice 2007-78 extends the plan amendment deadline to December 31, 2008.
What Has Not Been Extended. The Notice has not extended the December 31, 2007, deadline with respect to the following compliance requirements.
- 2007 Amendments. Nonqualified deferred compensation plans must specify, by December 31, 2007, a Section 409A-compliant time and form of payment for distributions of deferred compensation. Under Section 409A, deferred compensation may be distributed only upon (1) a separation from service, (2) a change in control, (3) disability, (4) death, (5) a specified date or (6) an unforeseeable emergency. In addition, if the plan provides for installment payments, the designation of such installments as separate payments (which helps exempt some or all of the installments from Section 409A) must be made by December 31, 2007.
- Exemptions. The Notice requires employers to determine prior to December 31, 2007 whether an arrangement is subject to or exempt from Section 409A. A plan may not be changed in 2008 to take advantage of an available exemption with respect to amounts that are deferred as of December 31, 2007.
- Transition Relief. The Notice does not extend previously granted transition relief under Section 409A. Most importantly, current transition relief permitting participants to elect by December 31, 2007, to change the time and form of payment of deferred amounts, without running afoul of the Section 409A restrictions on such changes, has not been extended beyond 2007.
- Operational Compliance. Section 409A has been effective since January 1, 2005. Since that time, only "good faith" compliance with Section 409A has been required. As of January 1, 2008, plans generally must be operated in full compliance with Section 409A and the final regulations.
What Has Been Extended—2008 Amendments. Final Section 409A documentary compliance amendments, other than those described above, must be made no later than December 31, 2008, and must be retroactive to January 1, 2008. For example, nonqualified deferred compensation plans must be amended by December 31, 2008, to reflect the six-month delay for certain distributions to key employees of publicly traded companies (if applicable).
New Limited Voluntary Compliance Program. The Treasury Department and the IRS expect to establish a limited voluntary compliance program for certain unintentional operational failures. Such guidance likely will permit employers to correct these operational errors in the same taxable year in which the errors are made. Participation in the program will limit the amount of deferred compensation subject to immediate taxation and the additional 20% penalty in the event of a plan failure under Section 409A. There is no indication that this program will provide relief for a plan’s failure to satisfy the Section 409A documentation requirements.
Comment. For most plan sponsors, the impact of the extension is largely illusory. While the notice provides additional time to complete the detailed re-drafting of plan documents, numerous critical compliance steps must still be completed this year. Specifically, before December 31, 2007, plan sponsors need to identify arrangements that are subject to Section 409A, amend plan documents to specify a Section 409A-compliant time and form of payment, decide whether to take advantage of expiring transition relief, and prepare for full operational compliance. The Employee Benefits and Executive Compensation Group at Ballard Spahr stands ready to assist you in analyzing and documenting your Section 409A compliance efforts.
Copyright © 2007 by Ballard Spahr Andrews & Ingersoll, LLP.
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