Recently-issued Treasury regulations (click here to view) give employers until December 31, 2007, to amend all of their nonqualified deferred compensation plan documents to comply with Internal Revenue Code Section 409A and these regulations. A group of 92 law firms with experience in advising clients on 409A, including White & Case LLP, sent a letter, dated August 21, to IRS Acting Commissioner Kevin Brown requesting that the IRS extend this deadline until December 31, 2008 (click here to view).

The requested extension reflects a number of concerns with the year-end plan amendment deadline, some or all of which may be relevant to you and your employees:

  • broad scope of 409A, which may entail reviewing not only traditional deferred compensation plans, but also stock option plans and agreements, bonus programs, employment agreements and severance plans;
  • length and complexity of the final regulations under 409A (which, along with the explanatory preamble, occupy more than 90 pages of the Federal Register);
  • continuing debate among practitioners, and evolving consideration and analysis by the IRS and Treasury, concerning issues raised by the 409A rules;
  • compliance with corporate governance processes adopted by many employers concerning decision making on executive compensation-related matters (including required involvement at the highest levels of management and by the board of directors or its compensation committee);
  • strain on limited resources and administrative burdens on employers and their advisers and service providers;
  • multiplicity of issues involved in amending plans, such as cost, tax, accounting, human relations, public relations, and securities law and other legal compliance;
  • time and effort needed to analyze and review affected plans and arrangements, decide on required amendments and draft, review, approve, communicate and implement those amendments; and
  • failure to comply with 409A will result in significant tax liabilities to employees, many of whom will have no involvement in the compliance process.

These concerns raise the possibility of unintentional noncompliance with the requirements of 409A, especially in light of the currently compressed timeframe for accomplishing all the necessary tasks.

In addition to a one-year extension of the deadline for documentary compliance with the 409A regulations, the letter also requests that all transition relief, including the standard of operating nonqualified deferred compensation plans in "reasonable good faith compliance" with 409A, be extended until December 31, 2008, that the effective date of the final regulations be moved from January 1, 2008, to January 1, 2009, and that the IRS solicit input on ways for employers to comply on a simplified and bulk basis and develop a voluntary correction program for inadvertent 409A violations.

Please watch for future Client Alerts concerning the IRS response and how it may affect you. In the meantime, please feel free to contact us directly with any questions you may have. White & Case would be pleased to work with you to comply with the 409A deferred compensation rules.

Click here for a few brief answers to commonly asked questions regarding complying with the final 409A regulations, and here to review a detailed analysis.