IRS Extends Section 409A Compliance Deadline to December 31,2008

S. James DiBernardo, Daniel L. Hogans and Mims Maynard Zabr
December 17, 2007 — 1,440 views  
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In Notice 200786 issued on October 22 by the IRS, and already enthusiastically applauded by employers, plan administrators, and advisors, the IRS has fully extended—from December 31, 2007 to December 31, 2008—the compliance due date under Section 409A of the Internal Revenue Code of 1986, as amended (Section 409A). In most material respects, Notice 200786 supersedes recently issued Notice 200778, which had provided an extension only for documentary compliance.

More specifically, Notice 200786 provides the following:

1.  Continuation of Reasonable, Good Faith Interpretation Standard: For the remainder of 2007 and all of 2008, the final regulations under Section 409A may be relied upon but are not binding. For periods after December 31, 2007, the proposed regulations issued under Section 409A should no longer be relied upon, with only limited exceptions.

2.  Extension of Amendment Period: Generally speaking, no plan adopted will need to comply with the final regulations until January 1, 2009, if (a) the plan is operated through December 31, 2008, in compliance with the provisions of Section 409A and applicable provisions of the initial guidance, Notice 20051, and any other generally applicable guidance published with an effective date prior to December 31, 2008; and (b) the plan is amended on or before December 31, 2008, to conform to the provisions of Section 409A and the final regulations under Section 409A.

3.  Changes in Elections Permitted On or Before December 31, 2008: As under the prior notices, taxpayers are permitted a transition period to make elections as to form and time of payment under nonqualified deferred compensation plans. These elections must be made no later than December 31, 2008, and may not (a) accelerate payments into the year of election or (b) defer into a later tax year amounts otherwise payable in the year of election (the “current year rule”). Thus, for example, in 2008, taxpayers may not use the transition relief to elect a distribution payable in 2008 or to defer amounts otherwise due in 2008.

On related topics:

  • Multiple elections are permitted with respect to the same deferred compensation amount. Suppose for example a plan participant elected in 2005 to receive an amount in 2010 as a lump sum. That participant could elect in 2006, 2007, and/or 2008 to change the time and form of payment so long as the current year rule is not violated and the plan permits the election.
  • Except as discussed below as to certain discounted stock rights, stock rights (such as stock options) may be amended to provide for fixed payment terms that comply with Section 409A, and such amendments will not be treated as impermissible under Section 409A even if the stock rights are currently exercisable, so long as the amendments are effective and any relevant elections made on or before December 31, 2008.

4.  Linked Plan Relief Extended: Also extended through December 31, 2008, is the ability to link payment elections under a nonqualified deferred compensation plan to an election made under a qualified plan. Further, the relief is extended to elections made with respect to Section 403(b) annuities, Section 457(b) plans and certain broad-based foreign plans.

5.  Discounted Options and SARs: Notice 20051 permits the replacement of a discounted stock option or stock appreciation right with a stock option or SAR that would not have been deemed discounted (or otherwise constitute deferred compensation) if so issued on the original grant date. Notice 200786 extends that relief through December 31, 2008, provided that the transaction does not result in the cancellation of a deferral in exchange for cash or vested property payable in the year of the transaction. Note, however, that no relief is available for certain backdated stock options granted to certain senior managers or directors.

6.  Correction Program: The notice also provides that Treasury and IRS anticipate issuing guidance as soon as possible with respect to the Section 409A correction program discussed in Notice 200778.

Points for Consideration:

  • While Notice 200786 provides welcome relief and permits employers and plan participants an opportunity to attain compliance with Section 409A at a more measured and thoughtful pace, the process should not be put on indefinite hold. This relief is almost certainly the last relief we will receive with respect to the compliance dates under Section 409A. A number of employers have made a significant amount of progress on the necessary revisions to their Section 409A programs and have found the process to be time consuming and challenging. We encourage employers to continue to pursue these Section 409A issues diligently.
  • If there are amounts payable under Section 409A plans that the employer wishes to allow to be paid at a different time or in a different form, elections may be made as to such amounts through December 31, 2008, as limited by the current year rule discussed previously. If the amounts are otherwise payable in 2008, the election must be made not later than December 31, 2007. Even if amounts are not otherwise payable in 2008, if the parties desire to accelerate payment of amounts into 2008, the election must be made by December 31, 2007. The employer may wish to permit participants to modify elections made in prior years (2005–06); however, employers are not required to do so.

For further information please contact your Morgan Lewis attorney or any of the following:

S. James DiBernardo
Partner
Morgan, Lewis & Bockius LLP
2 Palo Alto Square
3000 El Camino Real
Suite 700
Palo Alto, CA 94306
Phone: 650.843.7560
Email: [email protected]

Daniel L. Hogans
Partner
Morgan, Lewis & Bockius LLP
1111 Pennsylvania Avenue, NW
Washington, DC 20004
Phone: 202.739.5510
Email: [email protected]

Mims Maynard Zabriskie
Partner
Morgan, Lewis & Bockius LLP
1701 Market Street
Philadelphia, PA 19103-2921
Phone: 215.963.5036
Email: [email protected]

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S. James DiBernardo, Daniel L. Hogans and Mims Maynard Zabr

Morgan, Lewis & Bockius LLP