Short term deferral exception from 409A

[Christine Roberts]

Is is just me or did the final Sectin 409A regulations significantly curtail the short-term deferral exception?

As stated in the proposed regulations the exception applied whenever, absent an election by the employee, deferred compensation was "actually or constructively received by the [employee] by the later of the 15th day of the third month following the [employee's] first taxable year in which the amount is no longer subject to a substantial risk of forfeiture or the 15th day of the third month following the end of of the [employer's] first taxable year in which the amount is no longer subject to a substantial risk of forfeiture."

Under the final regulations, there is an additional requirement: in addition to the "timely receipt" requirement above, the deferred compensation plan may not "provide for a deferred payment" - i.e., it may not state that any payment will be made or completed on or after any date, or upon or after the occurence of any event [such as a separation from service or change in control] that will or may occur later than the end of the applicalbe 2 1/2 month period."

Example 6 in the Final Regulations (Section 1.401-1(b)(4)(iii)) describes a situation that would qualify for the short-term deferral exception under the Proposed Regs, but not the Final Regs: On November 1, 2008, employee obtains a LBR to severance pay on a separation from service. The example states: "Because the separation from service is an event that may occur after the applicable 2 1/2 month period, the bonus plan provides for a deferred payment and therefore provicdes for a deferral of compensation. Accordingly, the bonus plan will not qualify as a short-term deferral regardless of whether Employee F separates from service and the bonus is paid or maid available on or before March 15, 2009."

Any comments appreciated.