IRS Provides Additional Year to Comply with Final 409A Regulations on Nonqualified Deferred Compensation

Stephen J. Legatzke


October 25, 2007

On October 22, 2007, the IRS issued Notice 2007-86, which generally delays the need to comply with the Final Regulations under Section 409A of the Internal Revenue Code of 1986, as amended (the “Code”), until January 1, 2009.  As we previously informed you in another Client Alert sent earlier in the year, the Final Regulations were to become effective on January 1, 2008, and all plan documents and agreements had to be in compliance with them by December 31, 2007.  Last month, the IRS issued Notice 2007-78, in which the IRS delayed certain written documentation requirements, but had not delayed the date the plans and agreements themselves had to be in compliance with the Final Regulations.  Notice 2007-86 extends the transitional relief that was scheduled to expire on December 31, 2007, until December 31, 2008.  Under the Notice, plans are not required to comply with the requirements of the Final Regulations until December 31, 2008.  During 2008, taxpayers will be treated as complying with Code section 409A(a) if they apply a reasonable good faith interpretation of the statute and comply with IRS Notice 2005-1.  Actual compliance with the Final Regulations will be treated as good faith compliance with Code section 409A for the purposes of the transition rule.  The Notice does not provide any transitional relief with respect to Code section 409A(b), which applies to certain deferred compensation plans and arrangements that use foreign situs trusts or have transfers of property linked to a change in the financial status of the employer.

To read Notice 2007-86, please click here.

In a separate notice, Notice 2007-89 (issued on October 23, 2007), the IRS also provided additional guidance with respect to information reporting and the withholding of taxes on amounts includible in income under Code section 409A.  The IRS again delayed for 2007 the need for employers to report the amount of compensation deferred during the year that was subject to the Code section 409A(a) rules; however, employers (and other service recipients) are required to report and withhold (as supplemental wages) on the amounts includible in the employee’s income in 2007 as the result of Code section 409A.  With respect to amounts includible in income in 2007 as the result of Code section 409A(b), employers and payers are required to make a good faith application of a reasonable, good faith method to determine the amount includible in income for the purposes of reporting.

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This briefing is not intended to be, and is not, legal or tax advice.  Please consult your own tax advisor with respect to the consequences of section 409A of the Internal Revenue Code and the Treasury Regulations promulgated thereunder to you in light of your own particular circumstances.  In accordance with Treasury Circular 230, you are hereby advised that the discussion contained herein is not intended or written to be used, and cannot be used, by you or any person for the purposes of avoiding penalties for federal tax purposes or the promoting, marketing, or recommending to another party any plan or arrangement.