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A: The IRS recently extended, to December 31, 2008, the deadline for amendment of non-qualified deferred compensation plans to comply with the final regulations under Section 409A of the Internal Revenue Code. Before the extension, these formal amendments would have been required by the end of 2007.
The extension is welcome news to employers, but it doesn't change the fact that prompt action is required under Section 409A. Some action may still be necessary or desirable before the end of 2007. Also, the manner in which the employer operates its deferred compensation plans should be checked for continued compliance with Section 409A.
A: Employers should review all compensation plans and arrangements as soon as possible, to see whether these arrangements have deferred compensation elements covered by Section 409A and, if so, whether an exemption applies. In some cases, before the end of 2007, a plan amendment may still be necessary or a payment election may need to be made or changed, despite the IRS extension. Most importantly, the time and form for benefit payments that would otherwise be due in 2008 under a covered plan can only be modified before December 31, 2007.
Also, an employer should seek counsel if it is considering taking any of the following actions before (or after) the end of 2007:
(1) amending or adopting any plan covered by Section 409A,
(2) making any further payments under a covered plan, or (3) taking any action affecting benefit payments that would be due in 2007 or 2008 under a covered plan.
A: Because of the IRS extension, most formal plan amendments need not be signed until the end of 2008 to comply with the final regulations. We recommend that the amendments be drafted by the first part of 2008, in order to leave ample time for examination of all plans covered by Section 409A and to build the approval process into the timetable for compensation committee and board of directors approval. Taking action early will also make plan administration easier.
A: Yes. Section 409A covers any written (or oral) plan or agreement under which an employer has agreed to pay any type of compensation (including severance pay), or provide any other economic benefit, in a year later than the year when the compensation was earned, subject to some exemptions. Upon a comprehensive review, many employers are surprised by the number of plans and agreements involving employees or independent contractors that are covered by Section 409A and are not exempt.
Example: An employer has agreed to make payments to an employee in the future upon retirement, or upon any sale of the employer. Unless an exemption applies, this agreement is a plan that should be checked for Section 409A compliance. We have included many other examples in the resources linked below.
A: A current review of plans and their operation is still advisable before the end of 2007, especially if the last review was done before the final regulations were issued in April 2007. A fresh review can ensure compliance with the final regulations and determine whether the last review missed any plans that need to be considered. In addition, new Section 409A issues may be created by any recent (or anticipated) compensation deferral or payment elections, payments under covered plans or plan modifications.
A: Non-compliance with Section 409A could result in severe tax penalties, which would be imposed on the individual participants, including company executives. These could include current tax liability on payments to be received in the future, plus a 20% excise tax and interest. Companies that fail to bring their plans into compliance will have very unhappy executives and employees.
A: To help you prepare for the upcoming deadlines, we've provided the following resources:
Please contact a member of our Employee Benefits and Executive Compensation Team with any questions or concerns you may have about this important topic.
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