Originally published 23 October, 2007
This article provides an update from the September 11, 2007 Alert by Chadbourne & Parke LLP. Please click on the Previous Page link at the end of this article to read this.
Yesterday, in response to a number of requests by
practitioners and other interested parties, including a letter submitted
by Chadbourne & Parke LLP and nearly 100 other law firms, the Treasury
Department and Internal Revenue Service extended the deadline for complying
with Internal Revenue Code Section 409A to the end of 2008. This additional
relief is set forth in Notice 2007-86. This additional
relief supersedes much of the limited relief issued by the Treasury and
IRS in September 2007 in Notice 2007-28.
Here are some highlights of IRS Notice 2007-86:
- Final Regulations Need
Not Be Complied With Before 2009. Plan sponsors are not required to comply with
the final regulations under Section 409A under January 1, 2009. In the
interim, reasonable, good-faith compliance with Section 409A and guidance
issued under Section 409A (most notably, Notice 2005-1, in addition to the
final regulations) is still required. During 2008, however, reliance
on the proposed regulations will not be considered to be
reasonable, good-faith compliance with Section 409A.
- Plans Need Not Be
Amended to Comply with Section 409A Until December 31, 2008. This deadline was extended
to December 31, 2008 in Notice 2007-28. Plan sponsors now have until
the end of 2008 to bring their nonqualified deferred compensation plans
into compliance with Section 409A.
- New Payment Elections
Can Generally Be Made Through December 31, 2008. The date by which
participants can change their existing deferral elections for amounts that
are subject to Section 409A has been extended through December 31, 2008,
subject to the following rules: (1) with respect to a new election made
this year, that new election may not apply to amounts that are otherwise
payable in 2007, and may not cause amounts to be paid this year that would
not otherwise be payable in 2007; (2) with respect to a new election made
in 2008, that new election may not apply to amounts that are otherwise
payable in 2008, and may not cause amounts to be paid in 2008 that would
not otherwise be payable in that year; and (3) in all cases, the plan must
be amended by December 31, 2008 to reflect that changes to deferral
elections were permitted.
- Options and SARs May
Be Amended to Provide for Fixed Exercise Periods Through December 31,
2008.
Subject to the exclusion for certain back-dated stock grants noted below,
stock options and SARs that would otherwise constitute deferred
compensation under Section 409A may be amended through December 31, 2008
to provide for fixed exercise periods (to comply with Section 409A).
- Non-Exempt Options and
SARs May Be Replaced Through December 31, 2008. Subject to the
exclusion for certain back-dated stock grants noted in the next bullet
point, stock options and SARs that are not exempt from Section 409A may be
replaced by stock options and SARs that are exempt from Section 409A, as
long as the replacement occurs no later than December 31, 2008, and the replacement
does not result in the cancellation of a deferral in exchange for cash or
other vested property in the year in which the replacement occurs.
- Still No Relief for
Certain Back-Dated Stock Options and SARs. As previously set
forth in Notice 2006-79, the transitional relief applicable to stock
options and SARs (including those provisions described in the prior two
bullet points) is not available with respect to any stock
grant that meets all three of the following conditions: (1) the stock
grant applies to stock that, as of the date of grant, was required to be
registered under Section 12 of the Securities Exchange Act of 1934; (2)
the stock grant was made to a person who, as of the date of grant, was
subject to the disclosure requirements of Section 16(a) of the Securities
Exchange Act of 1934; and (3) such stock grant causes, or is reasonably
expected to cause, the issuing company to report a financial expense
because the stock grant was issued at lower than fair market value on the
date of grant and was not timely reported during the period in which it
should have been reported under generally accepted accounting
principles.
- Payment Terms May
Continue to Be Linked to Qualified Plans Through December 31, 2008. A nonqualified plan
whose payment terms are linked to the time and form of payment elected
under a qualified plan (for example, a qualified pension or 401(k) plan)
may continue to allow such linked payments through December 31, 2008, as
long as such linked payment provisions were permitted under the
nonqualified plan as of October 3, 2004.
- Relief Provided for
Plans That Took Advantage of "March 15, 2005 Deferral Rule." For the 2005 calendar
year, Notice 2005-1 allowed deferral elections to be made no later than
March 15, 2005 (rather than by December 31, 2004). In order to take
advantage of that rule, the plan was required to be amended to provide for
such elections by December 31, 2005. To the extent that plans missed that
deadline, those plans now have until December 31, 2008 to make the
necessary amendment.
For more information on the IRS’s notice providing this extended transitional relief (Notice 2007-86) and our prior client alerts on 409A, please visit www.chadbourne.com/409A.
The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.
