In another series of guidance related to nonqualified deferred compensation plans, the IRS has extended the deadline for bringing plan documents into compliance with the final regulations, issued under Section 409A of the Internal Revenue Code (Section 409A), until December 31, 2008; has provided a limited corrections program for certain failures in operating a plan in accordance with its terms; and has issued guidance for tax withholding and reporting for the 2007 tax year.
In Notice 2007-86, the IRS stated that plan sponsors would have until December 31, 2008, to conform plan documents with the final regulations issued under Section 409A. Plans must be operated in good faith compliance with Section 409A until January 1, 2009, which may be demonstrated only by reliance on Notice 2005-1 or the final regulations after December 31, 2007. The proposed regulations may no longer be relied upon after December 31, 2007, except with respect to certain transitional relief opportunities described in the proposed regulations that have been extended until December 31, 2008.
The extended transitional relief includes the ability to change elections regarding the time and form of payment, the opportunity to remove certain deferral features from stock options that have not yet been exercised, and the ability to link a payment election under a nonqualified plan to an election under a qualified plan. Note that changes in the form and timing of payments may be made only with respect to amounts that are payable after 2008, may not accelerate such payments into 2008, and must be made before December 31, 2008.
In Notice 2007-89, the IRS generally offered the same relief regarding reporting and withholding as was offered in 2005 and 2006, including that amounts deferred in 2007 are not reportable on Form W-2 and that amounts includable in income must be reported on Form W-2. Amounts included in income and reported in box 1 and box 12 (Code Z) of Form W-2 include amounts paid to a participant from a nonqualified plan in 2007 and amounts treated as includable in income due to noncompliance with Section 409A. For 2007, all amounts includable in income are treated as supplemental wages for withholding purposes, and no additional withholding for any applicable tax penalty is required. As in previous years, an employer that reports and withholds income subject to Section 409A in accordance with Notice 2007-89 will not be required to correct its forms W-2 after final reporting guidance is issued, nor will the IRS later assert additional withholding liabilities.
Finally, the IRS published a correction program for certain violations of Section 409A in Notice 2007-100. The violations eligible for correction under this program include only operational errors, where the terms of the plan satisfy the requirements of Section 409A but the plan was not operated in accordance with its terms. Items that may be corrected include deferrals that do not conform to proper elections, payment of an incorrect amount or at an incorrect time (including, through January 1, 2010, limited payments made to a specified employee of a public company before the end of the six-month delay period). In general, relief is not provided where the exercise of a stock right would not comply with Section 409A, and relief is not available if it is related to a significant downturn in the financial health of the employer. If an employer avails itself of the relief in this Notice, it must include a statement with its tax return describing the failure and the relief taken.