Everyone should be aware that the December 31, 2008 deadline for compliance by all deferred compensation plans, agreements and arrangements with Section 409A of the Internal Revenue Code of 1986, as amended, will soon be here. Since it is unlikely that there will be any more extensions, companies should make sure that their nonqualified deferred compensation plans and arrangements have been reviewed and amended as necessary for Section 409A compliance.

Covered Programs

In general, Section 409A applies to any arrangement in which an individual (executive, employee, director or independent contractor) has a legally binding right to receive compensation in one year that will be paid in a future year. Such broad coverage includes and affects:

  • Supplemental executive retirement plans
  • Excess benefit plans
  • Traditional nonqualified deferred compensation plans
  • Change-of-control agreements
  • Severance plans as well as severance provisions in offer letters
  • Certain equity compensation arrangements, such as restricted stock units and phantom stock programs
  • Performance award programs
  • Bonus plans
  • Long-term incentive plans

Beginning January 1, 2009 covered programs must be in documentary compliance with Section 409A – "good faith" compliance will no longer be acceptable. Consequently, all plan reviews and revisions must be made soon so that any required board of directors' actions may be taken in a timely and orderly fashion.

2008 Elections

Consideration should be given as to whether or not to allow a final opportunity to change existing distribution elections prior to December 31, 2008 (to the extent permitted by the Section 409A transition rules). In addition, except for certain performance-based programs, elections regarding 2009 deferrals have to be made by December 31, 2008.


Failure to meet the December 31, 2008 Section 409A compliance deadline could result in the imposition of a 20 percent excise tax on the individual (executive, employee, director or independent contractor) as well as possible interest charges.