The IRS has announced an extension of the deadline for amending deferred compensation arrangements to comply with Section 409A of the Internal Revenue Code and the final regulations issued in April.  IRS Notice 2007-86 extends to December 31, 2008 the transition relief that was scheduled to expire on December 31, 2007.

The transition relief granted last month in IRS Notice 2007-78 was limited, and did not provide adequate time for employers to analyze their plans and make informed and reasoned decisions to bring their plans into compliance with Section 409A.  This additional relief was granted in response to overwhelming comments to the IRS regarding the inadequacy of the previous relief.

IRS Notice 2007-86 provides that arrangements adopted on or before December 31, 2008 will be in compliance with respect to amounts subject to Section 409A if the plan is (i) operated through December 31, 2008 in compliance with Section 409A and applicable guidance published prior to January 1, 2008 (but excluding the 409A final regulations), and (ii) amended on or before December 31, 2008 to conform to the provisions of Section 409A and the final regulations.  Deferred compensation arrangements are not required to comply with the requirements of the final regulations during 2008; however, reliance on the final regulations will be treated as a reasonable, good faith interpretation of the statute.  To the extent an issue is not addressed in any published guidance, employers must apply a reasonable, good faith interpretation of the statute.  The Notice also confirms that the IRS expects to issue guidance on a Section 409A correction program in the near future.

While this extension is the ‘real deal,’ employers should not delay in working with their legal advisors to bring their deferred compensation documents into compliance with Section 409A.  Practically speaking, plans should already be in operational compliance with Section 409A in order to take advantage of this extension to the plan documentation deadline.  With the essential guidance finalized and an additional year to complete compliance efforts, there is no reason to expect any further extensions of the Section 409A compliance deadline.