Employee Benefits Law Alert: Extensive Transition Relief Under Internal Revenue Code Section 409A
The Internal Revenue Service has provided additional time for nonqualified deferred compensation arrangements to comply with the final 409A regulations issued under section 409A of the Internal Revenue Code. Notice 2007-86, issued October 22, 2003, extends the deadline to comply with the final regulations issued under section 409A to January 1, 2009 — a one-year extension.
Section 409A operates by specifying the nonqualified deferred compensation arrangements that are subject to its rules and by setting out detailed rules that must be satisfied with respect to (1) the timing of elections to defer compensation and (2) the timing of payment of amounts treated as deferred. To the extent these rules are not met, section 409A accelerates the taxation of deferred amounts and imposes an additional 20 percent penalty tax on the amount included in income and an additional interest charge on amounts deferred at the IRS's interest rate for underpayments, plus 1 percent.
Before issuance of Notice 2007-86, employers were required to comply with the final 409A regulations beginning on January 1, 2008. The IRS earlier responded to a series of requests for additional time to comply with the final regulations, by issuing Notice 2007-78. That notice extended the date for amending deferred compensation arrangements subject to section 409A to comply with the final regulations to December 31, 2008, but did not provide any relief from the requirement that nonqualified deferred compensation plans comply in operation with the final regulations beginning on January 1, 2008.
Notice 2007-86 extends the deadline for operational compliance with the final 409A regulations to January 1, 2009. Employers may rely on the guidance provided in Notice 2005-1 and the proposed regulations through December 31, 2007. After December 31, 2007, and through December 31, 2008, employers may rely on the guidance provided in Notice 2005-1, but not the proposed regulations (except for the sections of the preamble dealing with the application of section 409A to partners and partnerships, changes in payment elections or conditions, and substitutions of nondiscounted stock rights for discounted stock rights). To the extent an issue is not addressed in Notice 2005-1, employers must apply a reasonable, good-faith interpretation of the statute. Although reliance on the final regulations will constitute a reasonable, good-faith interpretation of the statute in these situations, other interpretations may as well.
The deadline for plans to be amended to be in compliance with the final regulations continues to be December 31, 2008.
Notice 2007-86 also extends the transition rule that permits participants to change payment elections with respect to both the time and form of payment without violating section 409A. Payment elections can now be changed as late as December 31, 2008. However, it should be noted that the existing limitations on changing elections still apply: a change to the time or form of payment made in 2007 cannot cause a payment otherwise due in 2007 to be paid in a different year or cause a payment otherwise due in a different year to be paid in 2007. Similarly, a change in the time or form of payment made in 2008 cannot cause a payment otherwise due in 2008 to be paid in a different year or cause a payment otherwise due in a different year to be paid in 2008.
Notice 2007-86 provides the transition relief employers were disappointed to see missing from Notice 2007-78. In addition to the relief described above, Notice 2007-86 addresses several other issues. These issues will be discussed in detail in a subsequent Client Alert.
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This Client Alert is a brief summary of some of the provisions of Notice 2007-78. In the interest of brevity, many details and issues have been omitted. If you have any questions or would like more information, please call one of the following attorneys:
Related Client Alert:
Employee Benefits Alert: Limited Transition Relief Under Internal Revenue Code Section 409A
Employee Benefits Law Alert: Overview of Key Provisions of the Section 409A Final Regulations
Employee Benefits Law Alert: Treasury and IRS Issue Final Regulations Regarding Deferred Compensation Plans
IRS Circular 230 Notice: Any tax advice contained herein was not intended or written to be used, and cannot be used, by you or any other person (i) in promoting, marketing or recommending any transaction, plan or arrangement, or (ii) for the purpose of avoiding penalties that may be imposed under federal tax law.
Christopher Briggs, an associate in our Seattle office, and Richard Hopp, a member in our Seattle office, prepared this Client Alert with the assistance of Christopher Heuer, a member in our Portland office.