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CCH® PENSION AND BENEFITS — 4/2/07

409A deferred comp regs likely to be issued soon, officials say

Treasury Department officials have indicated that Code Sec. 409A deferred compensation regulations are likely to be issued in the near future. Issuance of the regulations is "pretty close," according to Dan Hogans and Bill Schmidt of the IRS, who predicted the regulations would have a January 1, 2008 effective date. Stephen Tackney and John Richards of the IRS indicated that issuance of the guidance was a matter of "weeks, not months," but were unwilling to predict the effective date. Hogans and Schmidt spoke at the Tax Executives Institute's 57th Midyear Conference, held in Washington, D.C. on March 20, 2007, and Tackney and Richards spoke at an American Payroll Association conference, held on March 22, 2007.

Documentation and reporting

The pending regulations are expected to address plan documentary compliance, Hogans indicated. The IRS was trying to take a "minimalist" approach, he indicated, but plans will still be required to describe election procedures, payout features, the six-month payout delay for key employees, and other choices available to employees.

After these regulations are issued, Tackney indicated, work will begin on the drafting of reporting regulations: how much to include in income for a taxable deferral, how much to pay or withhold, and how much to report for a deferred amount. Tackney noted the difficulty of determining deferred amounts for different types of plans: account balance plans, nonaccount balance plans, and other deferrals. Moreover, earnings on deferrals are also treated as deferred compensation, and must be tracked and reported. As a template for deferral reporting, Hogans indicated, the IRS will use previously issued transition rules for the reporting of amounts which must be included in income.

The IRS provided broad transition relief for 2005, but more narrow relief for 2006 and 2007, Richards noted. Employers have to report taxable amounts on Form W-2, using Code Z (income under a 409A plan), and withhold on the amounts. This can be difficult when there is no payment to the employee, it was noted. Once the IRS sees a Code Z amount, it will look for payment of the 20 percent penalty and the interest factor, Tackney indicated. Code Z should not be used to identify an actual distribution from a Code Sec. 409A plan, he said. Code Y on Form W-2 (deferrals under a 409A plan) will be used to identify deferred amounts, whether or not taxable, Tackney said. Code Y reporting was not required for 2005 or 2006.

Tackney noted that calculating the interest amount can be complicated, but noted that the issue was discussed for the first time in Announcement 2007-18 (CCH Pension Plan Guide ¶17,097T1). According to Hogans, the interest component raised the question of whether to apply an inventory system to multiple deferrals in future guidance.

Stock compensation

The forthcoming guidance will address the contentious issue of stock compensation, according to Schmidt. The treatment of stock options and separation pay is difficult, Schmidt opined. The regulations will address whose stock can be used in a controlled group, the valuation of stock, and safe harbors. Hogans said Congress wanted to carve out "vanilla" stock options that provided true equity: either stock in the employee's company or in a company in a direct line of ownership. Tackney noted that in Announcement 2007-18, the IRS provided relief for reporting taxable deferrals from backdated stock options, but employers still had to pay Code Sec. 409A taxes and interest.

Termination payments

Another area requiring additional guidance is the treatment of amounts payable in the event of an involuntary termination. Whether a termination is involuntary is a question of facts and circumstances, Schmidt stated. If dismissal is involuntary, it is a vesting event, and there is no deferred compensation, he stated. If it is merely a triggering event, however, the amount payable is deferred compensation, Schmidt indicated. Taxpayers have asked for more guidance and safe harbors regarding this issue, he said.

For more information on this and related topics, consult the CCH Pension Plan Guide.

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