On October 22, 2007, the Internal Revenue Service issued Notice 2007-86, generally extending until December 31, 2008 the transition period for full operational compliance with the recently-issued final regulations under Section 409A of the Internal Revenue Code, dealing with deferred compensation plans. This Notice supersedes earlier IRS guidance (highlighted in the August 2007 issue of the Update) providing more limited relief with respect to the extension of the 409A deadline for documentary compliance with respect to such plans.
Under the Notice, employers are generally given an additional year to analyze all deferred compensation plans, stock rights, employment offer letters employment agreements, severance agreements and other arrangements potentially subject to Section 409A. This much sought-after transitional relief effectively maintains the current status quo for one additional year, under which employers, while obligated to operate in “good faith compliance” with Section 409A, are not required to maintain strict compliance with the final regulations thereunder.
Some additional specific highlights of Notice 2007-86 include:
Deferred compensation amounts subject to Section 409A may be amended through new payment elections (affecting both timing and method of payment) made on or before December 31, 2008. Any such payment elections made during 2008, however, will not apply to amounts otherwise payable in 2008 and may not cause an amount payable in a later year to be accelerated into 2008. So, for example, where an amount would otherwise be payable upon an event, such as separation from service, an election in 2008 cannot change the amount payable in 2008 if the employee actually separates from service in 2008. Accordingly, employees seeking payment during 2008 of previously deferred compensation amounts should make sure an election providing for such payment is in place by December 31, 2007.
Payments made under a traditional deferred compensation plan (such as a “top-hat” plan or a SERP) on or before December 31, 2008, pursuant to a “linked payment election” under a qualified retirement plan (such as a 401(k) plan or defined benefit plan) will not violate 409A, provided that the linked election was in place prior to October 3, 2004 and provided that during 2008 certain rules regarding linked plans (found in the final 409A regulations) are strictly adhered to.
Discounted stock options may be replaced with non-discounted stock options, provided that such substitution takes place on or before December 31, 2008 and no additional consideration is paid in the same year in which the replacement occurs.
Notwithstanding the extension of the final deadline for bringing any nonqualified deferred compensation plans into full operational compliance with Code Section 409A, we continue to strongly encourage clients to inventory and review all compensatory arrangements potentially subject to Section 409A as soon as possible, in order to ensure both good faith compliance during 2008 and ultimate adherence to the final 409A regulations by December 31, 2008.
