Corporate Finance Lawyer & Attorney : Davis Wright Tremaine Law Firm

Employers have until Dec. 31, 2008 to amend deferred compensation plans

By Holly Wylam, Stuart Harris, Jeff Belfiglio, Sarah Bhagwandin, Jason Froggatt, Greg Hitchcock and
Anne Northrup

In response to the requests of a nationwide coalition of law firms, the IRS has issued Notice 2007-86, which extends until Dec. 31, 2008 the deadline for complete compliance with Internal Revenue Code Section 409A. The Notice also reiterates issues that employers should consider in advance of the new deadline. This article outlines the effect of Notice 2007-86 and recommends how to prepare for the 2008 deadline.

The Notice is welcome news for legal practitioners and employers who have been struggling to identify all affected nonqualified deferred compensation plans and bring them into operational compliance with Code Section 409A by the end of 2007 (the prior deadline). As described in prior DWT advisories in June and September, Code Section 409A imposes a complex set of requirements on nonqualified deferred compensation plans. The new law also defined the term “nonqualified deferred compensation plan” very broadly to include programs ranging from stock option plans to bonus commitments in individual employment agreements. The penalty for noncompliance is steep: all vested amounts deferred under the “plan,” plus any earnings, become immediately includable in the participant’s taxable income, along with a 20 percent penalty tax. Continue reading...

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The IRS has issued interim guidance on reporting and wage withholding requirements for amounts includible in gross income under Section 409A in year 2007.  Notice 2007-89 will appear in IRB 2007-46, dated November 13, 2007.

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The IRS has issued Notice 2007-86, which provides additional transition relief under Section 409A.  Notice 2007-86 will appear in IRB 2007-46 on November 13, 2007.  In general, the additional relief extends until December 31, 2008, the previous transition relief that was scheduled to expire at the end of this year.

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96 law firms have written another letter to the IRS asking for more time on 409A compliance, even after the IRS responded favorably (at least in some respects) to the first request.

Again, this demonstrates the complexity of this area.  We are happy to assist you with compliance.

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By Stuart Harris

In newly issued Notice 2007-78 (see also the press release), the IRS sets Dec. 31, 2008 as the deadline for amending documents to comply with Section 409A; however, the extended deadline does not apply to a plan’s obligation to designate, in writing, the timing and form of payment of current benefits, which for existing deferred compensation amounts must be done no later than Dec. 31, 2007. Similarly, the Notice does not extend the requirement to operationally comply with the final 409A regulations beginning Jan. 1, 2008. Continue reading...

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Yesterday, September 10, 2007, the Treasury Department and the IRS announced that taxpayers will have until December 31, 2008, to bring their documents into compliance with the final regulations under Section 409A of the Internal Revenue Code.  Previously the deadline was December 31, 2007.  In Notice 2007-78, the Treasury and IRS also announced that they anticipate issuing guidance containing a limited voluntary compliance program that will permit the correction of certain unintentional, operational violations of Section 409A.  IRS Notice 2007-78 does not, however, extend the January 1, 2008, effective date of the final regulations.  We previously blogged about 92 large law firms requesting this exact relief.  Final Section 409A regulations were issued in April of this year.  

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Demonstrating the complexity of Section 409A compliance, 92 law firms sent the IRS a letter this week asking it to extend the deadline for amendment to deferred compensation plans to comply with Section 409A until December 31, 2008 (as opposed to the end of the current year).  The letter emphasizes that the failure to comply or the consequences of errors in compliance will result in significant tax liabilities to the individuals involved.  The letter also reiterates the ABA's request to develop a voluntary correction program for inadvertent Section 409A violations.

The final Section 409A regulations  are long (397 pages) and complex.  If you need help reviewing your compensation arrangements, we are happy to assist. 

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Demonstrating the depth and scope of the reach of Section 409A today, the IRS reassured teachers and other school employees that they need not worry about the draconian Section 409A consequences if they are paid over a 12 month period (as opposed to only during the school year). 

The concern was that "when teachers and other employees are given an annualization election – that is, they are allowed to choose between being paid only during the school year and being paid over a 12-month period – and they choose the 12-month period, they are deferring part of their income from one year to the next. For instance, a teacher who chooses to get paid over a 12-month period, running from August of one year through July of the next year, rather than over the August to May school year, falls under this law."

"The IRS clarified that the new rules do not require school districts to offer teachers an annualization election. Thus, school districts that have not been offering teachers this election are not required to start." 

You can access Frequently Asked Questions for more information.

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On April 11, 2007, the IRS issued the final Section 409A regulations.

The IRS issued preliminary guidance on Section 409A in Notice 2005-1 on January 10, 2005.  The final regulations for the most part supersede Notice 2005-1, but in some respect the final regulations refer you back to Notice 2005-1.

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