On September 10, the IRS issued Notice 2007-78 as very limited relief for compliance of deferred compensation with the final regulations under Internal Revenue Code Section 409A. The final 409A regulations become effective on January 1, 2008. The new Notice generally permits plan document changes to be made on or before December 31, 2008, so long as they are made retroactively effective to January 1, 2008. However, not all documentation requirements are permitted this extended period.
The following steps are still required by December 31, 2007, to comply with 409A:
- Each payment subject to 409A must state in writing a distribution method compliant with 409A. Plans must specify an objectively determinable form of payment, payable on: (1) separation from service; (2) a change in control; (3) an unforeseeable emergency; (4) a specified date or fixed schedule of payments; (5) death; or (6) disability.
- Plans must be amended to eliminate provisions that allow discretion to distribute plan benefits over more than one taxable year.
- Plans must operate using 409A compliant definitions of “separation from service,” “change in control,” “unforeseeable emergency,” and “disability.”
- Severance arrangements generally must be amended to comply with the 409A definition of “good reason.”
Extended until December 31, 2008, are the following requirements:
- Plans may revise their distribution terms during 2008, on a limited basis, to add a provision permitting distributions to be made after the distribution event by the end of the participant’s taxable year (in which the event occurs) or within 90 days following the event.
- Plans of publicly-held companies have until December 31, 2008, to include the six-month delay rule in their plan documents, provided the plan is operated in compliance with the rule.
The Notice announces that forthcoming is guidance regarding a voluntary compliance program to correct inadvertent 409A operational defects. This program will allow plan sponsors to self-correct certain unintentional operational errors in the same taxable year and will provide methods to limit adverse tax consequences in the case of other unintentional operational failures.
The relief provided still requires that arrangements be reviewed and amended to insure compliance with 409A requirements that must be met by December 31, 2007. Thus, despite the relief offered, employers should likely proceed with making all necessary changes by December 31, 2007.