With open enrollment only weeks away, your new online system is still being tested. It's not going well. The latest merger, the largest yet, is closing at year-end, meaning thousands of new and wary employees must assimilate into your benefit programs. Your daughter wants to be who for Halloween? And isn't it your turn to host your spouse's family (all of them) for Thanksgiving?

Maybe it's not completely surprising that three-quarters of the companies responding to a survey said that changes wrought by Internal Revenue Code Section 409A and other legal changes were not one of their top five “total rewards” priorities in 2007.

We can only hope those weren’t our clients.

Nearly three years after the American Jobs Creation Act was signed into law, wary employers are rounding the last turn. Less than 100 days away lurks the January 1, 2008, deadline to have employment and change in control agreements and other deferred compensation plans operating in compliance with Section 409A and to have some critical terms reflected in plan documents.

There is no higher benefits priority for many companies right now, and it’s easy to see why. Violations carry significant tax penalties that directly hit top executives. Any arrangement that gives an individual a legally binding right in one year to compensation that might be paid in a future year is generally subject to Section 409A. If an arrangement violates Section 409A in form or operation, everything an employee intended to defer would become immediately taxable (even if he or she had not received payments) and an additional 20% penalty tax would also be levied.

At this point, employers are still evaluating what impact – if any – the latest IRS guidance will have on their compliance efforts. Under Notice 2007-78:

  • Employers will need to amend their employment agreements and other documents to include time and form of payment provisions that are compliant with Section 409A. This will need to be done by December 31, 2007. Other Section 409A-required provisions need not be added to documents until December 31, 2008.
  • Employment and other agreements can be modified to add Section 409A-compliant “good reason” termination language, but only if amounts under such an agreement had been subject to a “substantial risk of forfeiture” all along. This may require employers to renegotiate multiple agreements and get appropriate approvals internally in a very short time.
  • Employers with plans or agreements providing for immediate payout of sums that fall below a pre-determined amount must select that amount by December 31, 2007.

It is important to note that employers that are putting off some document amendments until 2008 still need to be able to ensure consistency and operational compliance throughout the year – i.e., does the HR director at your Los Angeles headquarters know how the regional HR office in New York handles requests for unforeseeable emergency distributions, and is that arrangement compliant with Section 409A?

Among the key compliance considerations for our clients in this critical time leading up to the deadline are:

  • Assessing opportunities to use the “short-term deferral” and other exceptions to the definition of deferred compensation under Section 409A.
  • Esuring that each agreement or plan includes compliant time and form of payment provisions this year.
  • Evaluating whether to use the safe harbor in the final 409A regulations for “good reason” terminations, or whether to use a different definition.
  • For public company clients, evaluating ways to minimize the impact of the six-month delay for specified employees and, more basically, ensuring that a consistent approach is in place for identifying “specified employees.”