Ever since the series finale of “Mad Men,” I’ve been thinking a lot about old commercials. One commercial in particular involves Heinz ketchup. In the ad, someone would turn the bottle upside down, and the ketchup would take an extremely long time to pour out of the bottle and onto a sandwich. An announcer would then say the slogan: “The best things come to those who wait.” Apparently, Heinz wanted us to believe that patience was a virtue—rewarded by its ketchup.

Marketing gimmicks aside, the IRS has taken a similar view (towards patience, not ketchup) with respect to tax guidance that impacts executive compensation arrangements. In a notice published in 2007, the IRS announced its intent to issue new regulations under Code Section 457(f) in an attempt to harmonize Code Sections 457(f) and 409A. Over eight years later, we are still waiting for that guidance. The wait may soon be over, however, because IRS officials informally have indicated that this guidance is “very, very close” to be released, probably by the end of this year or early in 2016. The two pieces of guidance presumably will not be issued at the same time.

As background, Code Section 409A applies to nonqualified deferred compensation (NQDC) plans, and it imposes strict tax penalties for failure to follow restrictions on the timing of deferral elections, limitations on distribution events, and restraints on the ability to accelerate or delay payment. Code Section 457(f) applies to NQDC plans sponsored by tax-exempt and governmental employers. Under Code Section 457(f), amounts deferred become immediately includable in income when they are no longer subject to a “substantial risk of forfeiture.” The difficulty for practitioners is that Code Section 409A and 457(f) both apply to NQDC plans of tax-exempt employers, but the two different Code Sections have different and somewhat conflicting terms. The IRS guidance is expected to clarify these issues and in the process, allow the IRS to revise certain other aspects of the Code Section 409A regulations that apply to all employers. Based on reports we have seen, we expect the future guidance to address the following issues.

Substantial Risk of Forfeiture. Certain items that are considered a “substantial risk of forfeiture” that defers taxation under Code Section 457(f) are disregarded for purposes of Code Section 409A, meaning that these items will not exempt an NQDC arrangement from Code Section 409A’s strict rules. One such item is a non-compete arrangement. Another is the addition or extension of a substantial risk of forfeiture after the legally binding right to compensation arises (a “rolling risk of forfeiture”). Under the appropriate circumstances, non-compete arrangements and rolling risks of forfeiture may be respected as proper income deferral techniques under Code Section 457(f), but they are not respected under Code Section 409A. Many commentators expect the new guidance to align the Code Section 457(f) substantial risk of forfeiture definition more closely to the Code Section 409A definition.

Severance Pay. Code Section 457(f) does not apply to “bona fide severance pay,” meaning that compensation will be taxed when paid under these types of arrangements rather than at vesting. Code Section 409A contains a separation pay exception that somewhat overlaps but generally is more restrictive than the Code Section 457(f) severance exception. Many commentators expect the guidance to provide a consistent exception for severance pay that probably will be more in alignment with the current Code Section 409A definition than the Code Section 457(f) definition.

Income Inclusion. The IRS previously issued proposed regulations that explain when amounts under NQDC plans that violate Code Section 409A are required to be included in taxable income and also how to apply the additional taxes and penalties. The IRS has since issued other pieces of guidance that explain how these proposed regulations apply to specific situations (e.g., stock options). The IRS has said that part of the Code Section 457(f) and 409A guidance harmonization will include finalization of the income inclusion regulations under Code Section 409A.

Corrections Program. Additionally, the IRS has published several pieces of guidance describing how to correct both NQDC plan document and operation errors under Code Section 409A. Another part of the project will include consolidating this guidance into one place and clarifying other aspects of the corrections program, including possibly expanding the range of permissible corrections.

Next Steps. There is still a lot on the plate (not including Heinz ketchup) of the IRS, but it appears that relatively soon we will see proposed regulations under Code Section 457(f). Those proposed regulations will pave the way for additional guidance under Code Section 409A. We are closely monitoring developments, and will, of course, keep you informed of any issued guidance and let you know whether that new guidance will require changes either to the design or administration of the NQDC arrangements.