Good news from the IRS! The Internal Revenue Service has extended the deadline by which nonqualified deferred compensation plans must be amended to comply with Section 409A of the Internal Revenue Code. Employers and employees have an extra year - until December 31, 2008 - to redesign their employment agreements, severance plans, supplemental retirement plans, bonus incentives, equity-based compensation and other deferred compensation arrangements to avoid current income taxation and a 20% excise tax on the compensation deferred under these plans and arrangements.

Specifically, Notice 2007-86 provides the following:

  • Plan Amendments and “Good Faith” Operational Compliance. The Notice extends until December 31, 2008 the date by which deferred compensation plans subject to Section 409A must be amended to conform to the provisions of Section 409A and the final regulations (i.e., documentary compliance). Even though documentary compliance is not currently required, plans must be operated in reasonable, good faith compliance with Section 409A until December 31, 2008.
  • Changes in Payment Elections. Changes to the form of payment elections and the time of the payment of nonqualified deferred compensation may be made until December 31, 2008 without the changes being treated as an acceleration of a payment or being subject to Section 409A’s restrictions on re-deferrals. The Notice retains the limitations in the prior relief that elections made in 2008 to change the time and form of payment cannot delay receipt in a later year of amounts otherwise payable in 2008 or accelerate the payments into 2008 that would not otherwise be payable in 2008.
  • Payments linked to Qualified Plans. The ability to link a payment election under a nonqualified deferred compensation plan to an election under a qualified retirement plan (for example, making a SERP payment at the same time and in the same form as the distribution under the qualified retirement plan) has also been extended through 2008, provided that as of October 3, 2004, the terms of the nonqualified deferred compensation plan provided for the linked payment. This transitional relief includes nonqualified deferred compensation payments linked to 403(b) and 457(b) plans, as well as foreign-based plans.
  • Substitutions of Non-Discounted Stock Rights for Discounted Stock Rights. The Notice generally extends to December 31, 2008 the ability to replace “discounted” stock rights (i.e., stock options granted with an exercise price that is less than the fair market value of the underlying stock on the grant date) with new stock rights that satisfy the 409A requirements provided that the replacement arrangement, if occurring in 2007, does not result in the cancellation of a deferral in exchange for cash or vested property in 2007, and if occurring in 2008, does not result in the cancellation of a deferral in exchange for cash or vested property in 2008. Thus, a discounted stock option may be replaced through December 31, 2008 with a fair market value stock option as long as the optionee does not receive any additional payment with respect to the lost discount element in the year the stock option was replaced.

The Notice does not extend the transitional relief with respect to “discounted” stock rights granted by public companies to Section 16 “insiders”, which expired as of December 31, 2006.