Faced with the daunting task of amending their non-qualified deferred compensation plans and implementing those changes by December 31, 2007 to comply with the Final Regulations issued under Section 409A of the Internal Revenue Code ("Section 409A"), plan sponsors now have an additional year to fully understand and implement these complex requirements pursuant to IRS Notice 2007-86. This Alert outlines the additional 2008 transition relief granted to sponsors of non-qualified deferred compensation plans by the Department of Treasury and Internal Revenue Service in IRS Notice 2007-86
The Notice provided the following transition relief:
- Extension of the Effective Date of the Final Regulations - Originally, the Final Regulations issued under Section 409A were to become effective January 1, 2008. However, the Notice extends the effective date of the Final Regulations to January 1, 2009. Prior to January 1, 2009, plan sponsors must operate their non-qualified deferred compensation plans in compliance with their terms, to the extent consistent with Section 409A, and any applicable guidance issued under Section 409A with an effective date prior to January 1, 2008. To the extent an issue is not addressed in that guidance, plan sponsors must apply a reasonable, good faith interpretation of Section 409A. Compliance with the Final Regulations will be deemed reasonable, good faith compliance.
- Written Plan Requirements - Plan sponsors will now have until December 31, 2008, to amend their plans to satisfy the requirements of Section 409A and the Final Regulations issued thereunder.
- Changes to Payment Elections - With respect to amounts that are subject to Section 409A, plan sponsors may permit participants to make new elections as to the time and form of payment at any time prior to January 1, 2009. Such elections will not be treated as a change in the time and form of payment (which would generally require the payment to be delayed for an additional 5 years) or an acceleration in violation of Section 409A, provided the non-qualified deferred compensation plan is amended by December 31, 2008, to permit such election changes. With respect to a change in the time and form of payment that is made on or after January 1, 2008, and on or before January 1, 2009, the election may only apply to amounts that would not otherwise be payable in 2008 and may not cause a payment to be made in 2008 that is scheduled to be made at a later date.
- Payments Linked to Qualified Retirement Plans - Plan sponsors may continue to make payments under a non-qualified deferred compensation plan that are linked with respect to the time or form of payment elected by a participant under a qualified retirement plan, 403(b) plan, 457(b) plan, or certain foreign broad-based plans through December 31, 2008. Effective January 1, 2009, separate payment elections must be made with respect to benefits accrued under a non-qualified deferred compensation plan, i.e., "linking" is no longer permitted.
- Discounted Stock Options. Stock options and stock appreciation rights (SAR) that are granted with an exercise price less than 100% of fair market value on the date of grant are subject to Section 409A and, to avoid penalties under Section 409A, must be (i) amended to conform to the requirements of Section 409A, which would generally require a fixed exercise date or (ii) cancelled and replaced with a stock option or SAR with an exercise price that is 100% of fair market value on the original date of grant, provided such amendment is not in exchange for cash or other vested property that is paid in 2008. This relief is not available, however, for any stock options or SARs granted to a Section 16 officer of a public company that has reported or reasonably expects to report the financial expense of a discounted stock right to address back-dated stock option grants.
- Notice 2007-78 Partially Rescinded. The Department of Treasury and IRS had previously granted more limited transition relief in Notice 2007-78. That relief has been rescinded, however, the provisions related to employment agreements and pre-determined cash-outs of installment payments under a non-qualified deferred compensation plan continue to apply.
- Voluntary Correction Program. The Notice also provides that a voluntary correction program will be established, and that the Treasury Department and IRS expect to issue guidance in the near future related to such program.
Finally, the Notice indicates that the transition relief granted through December 31, 2007, related to certain assets that have been set aside, transferred, or restricted in violation of Section 409A(b) ("grace period assets"), has not been extended.