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CCH® PENSION AND BENEFITS — 11/1/06

409A guidance "well along," says Treasury benefits tax counsel

Daniel Hogans, attorney-advisor, Treasury Office of Benefits Tax Counsel, speaking at New York University's 65th Institute On Federal Taxation in New York on October 22, 2006, reported that, while the final regulations under Code Sec. 409A would not be released immediately, Treasury is "well along in the process."

Both Hogans and William Sweetnam, Jr., principal, Groom Law Group, Washington, DC, who together had co-authored the proposed regulations at Treasury last year, agreed that recent Notice 2006-79 (CCH Pension Plan Guide ¶17,134Q ), which extended transitional relief from the anticipated final rules until the end of 2007, probably allows just enough time for some businesses to get all their compensation agreements in order. Full compliance under the final regulations will be a significant undertaking, they predicted, not necessarily because of their complexity but because of their reach.

Determining definition of deferred comp

Hogans and Sweetnam also reported that one of the issues central to many of the comments received in response to the proposed regulations was how to define deferred compensation under Code Sec. 409A. An ancillary problem for Treasury policymakers in their outreach work apparently has been convincing taxpayers of the breadth of the definition of deferred compensation for Code Sec. 409A purposes. The message they want spread is that the definition of nonqualified deferred compensation is broad, with most exceptions and carve outs limited in scope.

Final rules will have more practical bent

Hogans forecasted that the next set of regulations under Code Sec. 409A will not be in the form of reproposed rules but instead would be issued as final. He reported that a broad array of issues has been vetted through "literally hundreds of comment letters" and that issuance of final rules, therefore, is appropriate. Hogans said that the basic structure and fundamental principles underlying the proposed rules have remained intact during the comment process.

The issues that are now being addressed in developing the next iteration of rules are focused on "the edges," especially the carve outs that included short-term deferrals and severance pay. Hogans characterized the changes being considered as part of a more practical perspective being adopted toward identifying nonqualified deferred compensation for purposes of applying the Code Sec. 409A rules.

Reporting and withholding rules

Hogans also reported that separate guidance on Code Sec. 409A reporting and withholding requirements in cases of violations is "well along" and should be expected soon.

Efforts are being made in the anticipated guidance to develop a more precise measurement of the included amount for reporting and withholding purposes. In connection with the value of discounted stock options, Hogans suggested that the spread, not just the discount, would be considered as the stock value increases. He also observed that, for the same reason, underwater stock options would not require any reporting since a violation would take place only if and when an option was exercised.

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

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