Section 409A Deferred Compensation Final Regulations Issued

(April 12, 2006)

The Treasury Department and IRS issued final regulations on deferred compensation arrangements under Section 409A of the Internal Revenue Code on April 10, 2007.  The final regulations are almost 400 pages long, but generally follow the rules provided in the proposed regulations issued in September 2005.  However, the final regulations do include some revisions and additional guidance in response to comments provided on the proposed regulations.  Many of the questions left by the proposed regulations have been answered by the final regulations.  The IRS also issued a notice providing new guidance on the application of Section 409A to split dollar life insurance arrangements. To view the final regulations click here or the split dollar notice click here.  Look for future Employer Alerts addressing the final regulations and the split dollar notice in more detail. 

Effective Dates

Section 409A is generally effective for amounts deferred on or after January 1, 2005.  Arrangements subject to Section 409A are subject to good faith compliance in operation from January 1, 2005 through December 31, 2007, and the deadline for amending documentation to comply with Section 409A is December 31, 2007.  The final regulations are applicable for tax years beginning on or after January 1, 2008, but taxpayers may rely on them for tax years beginning before that date.

Employer Action

With less than 9 months until the documentation compliance deadline, existing arrangements that have not already been reviewed should now be reviewed and amended, as necessary, or confirmed for reliance on the 409A grandfather.  Because the requirements of Section 409A are currently applicable, employers now routinely should be having any arrangement that might provide for deferred compensation reviewed by benefits counsel for compliance with Section 409A or one of the many Section 409A exemptions.  Arrangements that may be subject to Section 409A include deferred compensation plans and supplemental executive retirement plans, employment contracts, change in control agreements, severance plans and agreements, retention and incentive bonuses, nonqualified stock options, stock appreciation rights, phantom stock and other equity-based compensation, and split dollar life insurance.

If you have any questions regarding this alert or other Employee Benefits Law related issues, please contact one of our Employee Benefits attorneys.