Final regulations under Internal Revenue Code Section 409A ("Section 409A") are expected to be released by the Department of Treasury any day now.

As you may already know from previous Employee Benefits Alerts, Section 409A is a relatively new provision in Federal tax law that classifies many different kinds of arrangements and programs as "deferred compensation plans" if amounts that were earned in one year become payable in a later year. Consequently, the Section 409A rules affect many employment and buy-sell agreements, severance plans, and change in control programs, as well as traditional deferred compensation plans and executive compensation plans.

We expect that the final Section 409A regulations will become effective on January 1, 2008. Therefore, when the final regulations are issued (and they are expected to be massive—at least 300-400 pages), employers will need to undertake a comprehensive review of all of their employment and executive compensation programs to determine if they are affected by the new rules, and then adopt all required written changes to these programs within a very short time frame— by December 31, 2007.

The final Section 409A regulations are expected to include detailed guidance regarding:

  • Requirements for documentary and operational compliance
  • Treatment of stock options and stock appreciation rights
  • Exceptions for certain separation pay arrangements
  • Guidance regarding "good reason" terminations
  • Allowing different payout elections for different types of separation
  • Identification of specified employees in publicly-traded companies who can be subject to a 6 month delay for certain payments

While we hope that the new regulations will address these important issues, a word of caution is appropriate—these regulations will not be the final word on all of the complex issues involving executive compensation programs. The IRS will still need to finalize guidance on income inclusion, penalty taxes and interest, and reporting obligations, for which the interim guidance previously issued by the IRS will continue to apply.