IRS POSTPONES SECTION 409A DEADLINE FOR DOCUMENT
COMPLIANCE
The Internal Revenue Service
recently extended until December 31, 2008 the deadline for employers to amend
subject “nonqualified deferred compensation plans” to comply with Section
409A. Previously, such amendments
(and the adoption of written plan documents for subject arrangements not
previously reduced to writing) were required to be adopted by December 31, 2007.
This good news is qualified by an
exception that seems to apply to deferred compensation plans which permit
elective participant deferrals. Despite
the general deadline extension, if there have been any deferrals of compensation
under a subject plan that are not distributed by the end of the current 2007
calendar year, the plan must designate in writing before
January 1, 2008 a time and form of payment that complies with Section 409A.
This means that such plans must provide in writing for the payment of
benefits in an “objectively determinable form” on one or more of the
following Section 409A trigger events: a
separation from service, a change in control event, an unforeseeable emergency,
a specified date, disability or death. Remember
that these trigger events have very specific definitions under the Section 409A
final regulations and, although these definitions do not have to be incorporated
in writing until the extended December 31, 2008 deadline, subject plans must
nonetheless observe the Section 409A definitions in operation.
The IRS Notice extending the
Section 409A deadline also provides that a “limited” voluntary compliance
program will be implemented in order to allow employers to correct certain
“unintentional” operational violations of Section 409A. This is a significant development because operational compliance with
Section 409A is required now and has been required since January 1, 2005 with
respect to benefits vesting or accruing on or after that date. Previously, the IRS had advised that no such relief was available, so the
limited voluntary compliance program (which will be fleshed out in future IRS
guidance) is the only way to limit the amount of additional taxes due for
operational violations of Section 409A.
Recommendations:
Because operating compliance with
Section 409A is required now, no payments should be made under subject
nonqualified deferred compensation plans without first verifying the compliance
of any such payment with existing Section 409A guidance. Although plan documents can be amended later on, a current failure to
operate in compliance with Section 409A cannot be fixed except as may be
permitted in “limited” circumstances to be described in future IRS guidance.
Employers should review their
“nonqualified deferred compensation plans” now to determine if action in
writing is required by the end of this year in accordance with the above
exception to the general deadline extension. Because of the broad sweep of Section 409A, almost every arrangement that
provides employees and directors compensation payable in a form other than basic
salary should be reviewed for compliance purposes. Further, because operational compliance with existing IRS guidance has
been required since January 1, 2005, employers and HR staff should consider
using a draft of a 409A compliant document now as a compliance guide until the
final, formal changes are adopted before the extended December 31, 2008
deadline. Employers with informal
severance pay practices or policies also should consider putting those
arrangements in writing as required by Section 409A.
See http://www.benefitslawgroupofchicago.com/HTML/new-deferred-compensation-rules-2005.htm
for a general description of the plans and other arrangements that are subject
to Section 409A and the general substantive requirements of Section 409A.
Andrew
S. Williams
Aronberg Goldgehn Davis & Garmisa
One IBM Plaza, Suite 3000
Chicago, Illinois 60611
312/755-3145
awilliams@agdglaw.com
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