Impending Deadline for Compliance with Internal Revenue Code Section 409A

The year-end deadline for compliance with the Treasury Regulations under Section 409A of the Internal Revenue Code is approaching, and all companies with deferred compensation plans should be aware of this upcoming deadline.

These Regulations establish a deadline of December 31, 2007 for deferred compensation arrangements to be effectively updated, including operationally, to comply with Section 409A.

New Section 409A was added to the Internal Revenue Code in 2004, and became generally effective January 1, 2005. Section 409A applies to "deferred compensation arrangements" as very broadly defined. In general, and subject to a number of exceptions, "deferred compensation" means compensation for which a legally binding right arises in one taxable year but that is not to be paid until a later taxable year (and which may be conditioned upon the performance of future services).

Failure to comply with Section 409A will subject the service provider (whether employee or independent contractor) to a 20% excise tax, as well as interest penalties, on the deferred compensation. Section 409A applies to U.S. taxpayers even for income earned abroad, and applies to non-U.S. residents as to income earned in the U.S.

Treasury Regulations under Section 409A were issued in April 2007. IRS Notice 2007-78, issued September 10, 2007, provides some transition relief for documentary compliance to December 31, 2008. However, a deadline of December 31, 2007 remains in place for operational compliance and designation of the time and form of payment. Thus, a certain amount of document compliance drafting can be delayed until 2008, but a December 31, 2007 deadline generally still applies as of this writing.

The following is a list of the types of agreements, plans and arrangements that may provide for "deferred compensation" and thus may be subject to Code Section 409A. This list is not exhaustive, but should assist in identifying possible "deferred compensation" arrangements:

  • Employment Agreements
  • Severance Agreements
  • Offer Letters
  • Consulting or Independent Contractor Agreements
  • Change in Control Agreements
  • Director Fee Deferral Agreements
  • Deferred Compensation Plans
  • 457(f) Plans (tax-exempt and governmental entities)
  • Stock Options
  • Restricted Stock Units or Deferred Stock
  • Phantom Stock or Stock Appreciation Rights
  • Reimbursement Arrangements
  • SERPs, Excess or Supplemental Benefit Plans
  • Incentive or Profit Participation Plans
  • Bonus or Commission Plans

Again, it is important for companies to prepare for the year-end deadline or face possible penalties. Although certain documentary compliance can wait until 2008, many important documentary changes must be made by December 31, 2007.

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If you have any questions regarding this Client Alert or your Section 409A compliance, you may contact in our Newark office, Joan Disler at (973) 639-8298 or [email protected].

This document has been provided for informational purposes only and is not intended and should not be construed to constitute legal advice. Please consult your attorney in connection with any specific questions or issues that may impose additional obligations on you or your company under any applicable local, state or federal laws.

© 2007 Epstein Becker & Green, P.C.