Section 409A of the Internal Revenue Code (“Section 409A”) was enacted in 2004 to address nonqualified deferred compensation plans and generally was effective for amounts deferred after Dec. 31, 2004. After Dec. 31, 2008, if an arrangement violates Section 409A, the recipient will be immediately taxed on the value of the deferred compensation and assessed among other penalties, an additional 20 percent tax.

The deadline for full compliance with Section 409A is less than three months away. Employers should review their deferred compensation arrangements (which may include employment agreements, change of control agreements, severance plans, incentive plans and various other compensatory arrangements) to ensure documentary compliance by year-end. Since certain transition relief is scheduled to expire at the end of 2008, now may be the last opportunity to take advantage of the relief. Some of the more significant compliance and transitional issues are as follows:

Documentary Compliance:

Employers must amend deferred compensation arrangements by Dec. 31, 2008 to comply in form with the requirements of Section 409A.

Transitional Ability to Change Form and Time of Payments:

An amendment providing for new time and form of payment elections will be permitted, provided that the plan is amended and elections are made on or before Dec. 31, 2008. However, form and time of commencement elections cannot be amended during 2008 (1) to delay to a later tax year, payments that are otherwise scheduled to be made in 2008, or (2) to accelerate payments from a later year into 2008.

Time and Form of Payments Linked to Qualified Plans:

Effective Jan. 1, 2009, Section 409A will prohibit the time and form of distributions from a nonqualified deferred compensation plan from being linked to a qualified retirement plan. However, transitional relief still permits the continued linking until year-end.