On Monday, September 10, 2007, the Treasury Department and the IRS issued Notice 2007-78, which provides limited transition relief and additional guidance on the application of Internal Revenue Code Section 409A to nonqualified deferred compensation plans. Notice 2007-78 extends the deadline for plan document compliance under 409A from December 31, 2007, to December 31, 2008. The notice allows a plan to be amended retroactively to January 1, 2008, if the plan contains all of the provisions required by the 409A final regulations and reflects the operation of the plan on or after January 1, 2008.
Employers should understand that the notice does not extend the January 1, 2008, effective date of the final regulations. Thus, plans must comply in operation with the 409A final regulations during 2008. Moreover, if there have been deferrals of compensation under a plan as of January 1, 2008, and the deferred compensation has not been paid, the plan must designate in writing before January 1, 2008, a compliant time and form of payment. Therefore, the notice does not relieve employers of the obligation of reviewing all arrangements potentially subject to 409A by the end of the year, and most employers will still be required to take some action to bring plans into compliance with the final regulations in 2007.
The notice provides additional guidance related to the following topics:
- How to designate a compliant time and form of payment
- Retroactive adoption of permissible payment event definitions
- How to designate a specified payment date or fixed schedule of payments
- Retroactive amendments regarding the six-month delay on payments to specified employees
- Good reason termination provisions in employment agreements
- Extended, renewed or renegotiated employment agreements
- Predetermined cashout provisions for annuities and installment payments
Finally, the Treasury Department and the IRS anticipate issuing guidance in the near future establishing a limited voluntary compliance program that will apply to certain unintentional operational failures to comply with 409A. A copy of Notice 2007-78 can be obtained on the IRS' Web site.