Guest Article

(From the September 17, 2007 issue of Deloitte's Washington Bulletin, a periodic update of legal and regulatory developments relating to Employee Benefits.)

Additional Section 409A Transition Relief and Guidance

As anticipated, the IRS issued Notice 2007-78 on September 10, 2007 to extend until December 31, 2008, the deadline for IRC § 409A plan document compliance. The extension does not extend the time for complying with the final regulations or for making written designations of the time and form of payment. In addition to the extension of document compliance, additional guidance on good reason separations, employment agreements, cash out features and separation from service for specified employees are provided. The Notice also states that Treasury and the IRS expect to establish a limited voluntary compliance program, including the ability to correct payments in the same taxable year in which an operational failure occurred. Finally, the deadline to comply with the funding rules for amounts deferred on or before March 21, 2006 remains December 31, 2007.

2008 Transition Relief

Notice 2007-78 gives plan sponsors an additional year to amend their nonqualified deferred compensation plan documents for compliance with section 409A, subject to limitations with respect to designation of time and form of distribution. To be eligible for the extension, a plan must be operated in compliance with section 409A (and all applicable guidance thereunder) and must be amended on or before December 31, 2008, retroactively to January 1, 2008, to reflect the manner in which the plan was actually operated in 2008.

The Notice provides detailed transition rules for designating a compliant time and form of payment designation made by December 31, 2007. There is no extension of transition relief beyond the existing compliance deadline of December 31, 2007 for taxpayers (or the existing December 31, 2006 deadline for certain compensation amounts paid to certain Section 16 insiders).

Additional Guidance and Relief

Good Reason Conditions. If a good reason condition in an employment agreement is subject to a substantial risk of forfeiture, Notice 2007-78 provides that it may be modified by December 31, 2007, to conform to the final section 409A regulations without being treated as an extension of the substantial risk of forfeiture. If it is not already subject to a substantial risk of forfeiture, however, a good reason condition cannot be modified to create one.

Substitution Rule. Notice 2007-78 provides that, until further guidance is issued, if a right to deferred compensation payable only upon an involuntary separation from service under an employment agreement is automatically forfeited at the end of the employment agreement's term, then the grant of a right to deferred compensation in an extended, renewed, or renegotiated employment agreement will not be treated as a substitute for the forfeited right.

Predetermined Cashouts. Until further guidance is issued, Notice 2007-78 generally provides that a cashout provision can be part of an objectively determinable and nondiscretionary payment schedule if the payment schedule would otherwise meet the section 409A rules and if it can be demonstrated that the provision operates in an objective, nondiscretionary manner which does not provide the service recipient or service provider with the effect of a late election. In addition, until further guidance, this provision can be used in conjunction with an installment payment or annuity without violating the substantially equal payment rule by ignoring any lump sum cashout threshold.

Specified Employees. The Notice also provides relief from documentation requirements with respect to the specified employee requirements. Service recipients are obligated to operate in a consistent manner with respect to these requirements.

The information in this Washington Bulletin is general in nature only and not intended to provide advice or guidance for specific situations. If you have any questions or need additional information about articles appearing in this or previous versions of Washington Bulletin, please contact: Robert Davis 202.879.3094, Elizabeth Drigotas 202.879.4985, Taina Edlund 202.879.4956, Mike Haberman 202.879.4963, Stephen LaGarde 202.879-5608, Erinn Madden 202.572.7677, Bart Massey 202.220.2104, Martha Priddy Patterson 202.879.5634, Tom Pevarnik 202.879.5314, Tom Veal 312.946.2595, Deborah Walker 202.879.4955. Copyright 2007, Deloitte.