December 31, 2008, is the deadline by which nonqualified deferred compensation arrangements must be brought into documentary compliance with the requirements of Section 409A of the Internal Revenue Code, the final regulations and other applicable guidance. The availability of important transition relief regarding compliance with Section 409A will also expire on Dec. 31, 2008. It is not anticipated that the Internal Revenue Service (IRS) will extend this deadline. Note that the IRS has stated that a general amendment or savings clause that reflects the intent to comply with Section 409A or that purports to nullify any provisions that violate Section 409A will not, by itself, be effective in bringing an arrangement into compliance.
Penalties for Noncompliance
The failure of an arrangement to comply with the requirements of Section 409A results in harsh penalties on the individual, including the immediate taxation of an individual’s vested deferred compensation (even if the compensation has not yet been distributed) and the imposition of a 20 percent excise tax and interest penalties.
Examples of Deferred Compensation Arrangements
Section 409A defines deferred compensation broadly. The time and form of payment rules in Section 409A apply to any arrangement under which compensation that is earned (or to which there is a legally binding right) in one year is payable in a subsequent year unless the arrangement meets the requirements of an exception to Section 409A. Below are examples of compensation arrangements that should be examined for Section 409A compliance:
- Traditional deferred compensation agreements
- Employment and consulting agreements
- Severance agreements and plans
- Bonus and performance incentive plans
- Equity and equity-based plans including, stock option plans
- Supplemental retirement plans
- Post-retirement benefits
- Change-in-control agreements
- Indemnification agreements
- Split-dollar insurance agreements