Written compliance with the § 409A Final Regulation has been extended by the IRS through December 31, 2008. IRS Notice 2007-86, issued October 22, 2007, supersedes the limited transition relief that was provided in Notice 2007-78 issued in September 2007.
Written compliance with the § 409A Final Regulation has been extended by the IRS through December 31, 2008. IRS Notice 2007-86, issued October 22, 2007, supersedes the limited transition relief that was provided in Notice 2007-78 issued in September 2007. Although this extended transitional relief is welcome, employers must still take steps to ensure that all plans subject to § 409A are currently operating in good faith compliance with § 409A.
Operational Compliance and Plan Amendment: Under the new Notice, a plan adopted on or before December 31, 2008 will not be considered to violate § 409A if: (1) it is operated through December 31, 2008 in good faith compliance with § 409A and any generally applicable guidance with an effective date prior to January 1, 2008; and (2) the plan is amended to conform to § 409A and the Final Regulation on or before December 31, 2008. The term “generally applicable guidance” does not include the Final Regulation.
Compliance with the Final Regulation is not required until January 1, 2009. However, compliance with the Final Regulation prior to January 1, 2009 will constitute good faith compliance with § 409A. After January 1, 2008, reliance on the proposed regulations will not be considered good faith compliance. A plan will not be considered to be operated in good faith compliance with § 409A if discretion provided under the terms of the plan is exercised in a manner that causes the plan to fail to meet the requirements of § 409A.
Change in Payment Elections: Under the new Notice, the time and form of payment of nonqualified deferred compensation may be changed through December 31, 2008 without regard to the restrictions of § 409A. However, a change cannot be made that would affect amounts otherwise payable in 2008 or that would make an amount payable in 2008 that would not otherwise be so payable. Similar rules apply for 2007 and 2006. Effective January 1, 2009, under § 409A the time and form of payment of nonqualified deferred compensation generally cannot be changed unless the change is elected at least twelve months in advance of payment and the payment is deferred for at least five years.
Employment Agreements: Notice 2007-78 permitted the employer to 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. The new Notice extends this time period to December 31, 2008.
The new Notice does not otherwise modify the guidance provided in Notice 2007-78 with regard to the impact of extensions, renewals, or renegotiated employment agreements on payments that were conditioned on involuntary separation from service. It also does not modify the guidance provided in Notice 2007-78 with regard to the application of automatic cash-out provisions to annuities and installment payments.
Other Provisions: The new Notice also extends the ability to link a payment election under a nonqualified deferred compensation plan to an election under a qualified plan through 2008. Additionally, transition relief permitting the replacement of discounted stock options or stock appreciation rights (SAR) with a non-discounted stock option or SAR is extended until December 31, 2008.
If you have any questions regarding the Notice or the Final Regulation or need assistance in evaluating plan compliance, please contact Stephen Zweig, szweig@fordharrison.com, or any member of Ford & Harrison’s Employee Benefits and Executive Compensation Group.