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CCH® PENSION AND BENEFITS — 9/18/07

IRS provides one-year extension of deadline for 409A document compliance

Following the expression of concern by practitioners that compliance with the original deadline of December 31, 2007 would be problematic, the IRS has announced a one-year extension of the deadline for documentation compliance under Code Sec. 409A.

The final nonqualified deferred compensation regulations under Code Sec. 409A, issued on April 17, 2007 (CCH Pension Plan Guide ¶24,508O), are applicable to taxable years beginning on or after January 1, 2008. The final regs, prior to the extension provided in IRS Notice 2007-78, required the formal amendment of existing nonqualified deferred compensation plans by December 31, 2007 to reflect all material plan terms.

Under the transition relief provided by newly-released IRS Notice 2007-78, a nonqualified deferred compensation plan will not violate the requirements of Code Sec. 409A on or before December 31, 2008 merely because the written provisions of the plan fail to meet the requirements of the 409A guidance, provided that the plan is operated in accordance with the requirements of the 409A guidance and is amended on or before December 31, 2008 to comply with the 409A guidance retroactively to January 1, 2008. This relief, the IRS notes, does not extend the January 1, 2008 effective date of the final 409A regulations.

Transitional relief

The transitional relief of the Notice also includes guidelines under which, for periods on or before December 31, 2008, a nonqualified deferred compensation plan will be treated as meeting the requirement to timely designate a time and form of payment of an amount deferred under the plan. The guidance addresses:

• designation of the time and form of payment;
• designation of a compliant time and form of payment;
• retroactive adoption of permissible payment event definitions;
• designation of a specified payment date or a fixed schedule of payments; and
• retroactive amendments and the six-month delay on payments to specified employees.

Employment agreements, cashouts, voluntary compliance

The final 409A regulations state that if a plan provides that a voluntary separation from service will be treated as an involuntary separation under certain conditions, the separation will be so treated by the regulations if the conditions, known as the “safe harbor good reason conditions,” meet certain requirements. The Notice provides guidance as to when and how plans may conform existing safe harbor good reason conditions to the requirements of the regulations’ definition of an involuntary separation from service.

The Notice also provides guidance on conditions under which rights to deferred compensation, under an employment agreement extension or renegotiation, will constitute a new legally binding right to compensation rather than a substitution for rights to deferred compensation contained under a previous agreement.

In addition, the Notice provides guidance regarding the limited ability under the regulations to provide for the cashout of all remaining installments under an installment payment provision when the present value of the remaining payments falls below a predetermined threshold.

Finally, the Notice states that, in the near future, the IRS intends to release a limited voluntary compliance program that will apply to unintentional operational failures to comply with Code Sec. 409A.

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

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