A recent IRS Notice provides limited transition relief and additional guidance for compliance with the requirements of the § 409A Final Regulation, which are effective January 1, 2008.
A recent IRS Notice provides limited transition relief and additional guidance for compliance with the requirements of the § 409A Final Regulation, which is effective January 1, 2008.
Notice 2007-78 extends the time to comply with certain documentation requirements in the Final Regulation, but does not extend the deadline by which plans must be in operational compliance with the Regulation. Additionally, the Notice does not extend the “good faith” compliance period, which will end December 31, 2007. Thus, “service recipients,” i.e., employers, must ensure that they are in operational compliance with the requirements of the Final Regulation beginning January 1, 2008. A detailed discussion of the Final Regulation’s requirements is available on our web site at http://www.fordharrison.com.
The Limited Transitional Relief
1. Notice 2007-78 extends until December 31, 2008 the requirement that the material terms of a nonqualified deferred compensation arrangement plan be in writing, as long as the plan is operated in accordance with the requirements of the § 409A Final Regulation and is amended on or before December 31, 2008 to comply with the Final Regulation retroactively to January 1, 2008.
CAVEAT – Before January 1, 2008, however, the plan must designate in writing a compliant time and form of payment for deferrals of compensation made under the plan as of January 1, 2008. While the designation may be made in a separate document, it must provide for payment on an event permissible under the Final Regulation, such as separation from service, change in control, unforeseen emergency, a specified date or fixed schedule of payments, death or disability. The time and method of payment must be objectively determinable, and any impermissible discretionary provisions must be deleted on or before December 31, 2007. After January 1, 2008, changes to the time and payment of deferred compensation can be made only in accordance with the strict guidelines set forth in the Final Regulation.
2. The Notice provides that employers have until December 31, 2008 to amend the definitions of “separation from service,” “change in control,” “unforeseeable emergency,” or “disability” to comply with the Final Regulation.
CAVEAT – The plan must operate using compliant definitions beginning January 1, 2008.
3. Publicly held companies have until December 31, 2008 to amend their plans to include the six-month delay rule.
CAVEAT – The plan must operate in compliance with the six-month delay rule beginning January 1, 2008.
Additional Guidance For Compliance
1. The Notice clarifies that the employer may amend the definition of good reason termination to conform to the Final Regulation’s safe harbor provision, as long as the amendment is made on or before December 31, 2007, a substantial risk of forfeiture exists, and payment of the severance benefit would not otherwise have occurred in 2007.
2. The notice also addresses the impact of extensions, renewals, or renegotiated employment agreements on payments that were conditioned on involuntary separation from service.
3. Additionally, the notice addresses the application of automatic cash-out provisions to annuities and installment payments.
4. The Notice also indicates the IRS will issue a limited voluntary compliance program that will apply to certain unintentional failures to operate a plan in compliance with the Final Regulation.
Although the Notice’s transition relief is welcome, it is quite limited and does not eliminate the need for employers to review all plans subject to § 409A to ensure they will be in operational compliance with the Final Regulation beginning January 1, 2008. If you have any questions regarding the Notice or the Final Regulation or need assistance in evaluating plan compliance, please contact Stephen Zweig, firstname.lastname@example.org, 212-453-5906, or any member of Ford & Harrison’s Employee Benefits and Executive Compensation Group.