On April 10, 2007 the Treasury Department and the IRS issued final regulations under Internal Revenue Code Section 409A ("409A"). The final regulations provide definitive guidance on the taxation of nonqualified deferred compensation and amounts includible in income under 409A. The final regulations have the same structure, and implement the same concepts, as those set forth in the proposed regulations under 409A. However, there are several key changes and clarifications in the final regulations, many of which provide significant relief to taxpayers. For detailed discussions of 409A and the prior guidance issued under 409A, please see the October 2004, January 2005, November 2005, December 2005, January 2006, November 2006 and December 2006 issues of the White & Case LLP Compensation, Benefits and Employment Law Focus.

Enacted as part of the American Jobs Creation Act of 2004, 409A is applicable to amounts deferred in taxable years beginning after December 31, 2004 and amounts deferred in taxable years beginning before January 1, 2005, if the plan under which the deferral is made was materially modified after October 3, 2004. 409A provides that all amounts deferred under a nonqualified deferred compensation plan are included in income when deferred (or, if later when the amounts are no longer subject to a substantial risk of forfeiture) unless certain requirements established by 409A are satisfied. If an amount of deferred compensation is required to be included in income under 409A, that amount is subject to ordinary income tax plus an additional 20 percent income tax, and interest may be assessed on tax underpayments in certain circumstances.

The final regulations will not become effective until January 1, 2008. A nonqualified deferred compensation plan subject to 409A will not be treated as violating 409A on or before December 31, 2007 if the plan is operated in reasonable good faith compliance with 409A and the plan is amended on or before December 31, 2007 to conform to the provisions of 409A and the final regulations.

Employers maintaining nonqualified deferred compensation plans that are subject to 409A should operate the plans in reasonable good faith compliance with 409A at all times and prepare to bring the plans into full administrative compliance with 409A by December 31, 2007. Specifically, employers should now review each of their nonqualified deferred compensation plans (even plans with 409A amendments based on the proposed regulations) and prepare and adopt amendments to bring the plans into full compliance with 409A before 2008.