The Internal Revenue Service has provided a meaningful extension to the deadline for employers to comply with Section 409A regulations on nonqualified deferred compensation. IRS Notice 2007-86, issued on Monday, Oct. 22, 2007, provides broad transition relief and favorably modifies the limited relief granted in early September 2007. The new Notice provides the following relief:

  • Gives employers until Dec. 31, 2008 to amend their deferred compensation plans to comply with Section 409A
  • During 2008, employers may comply with Section 409A by applying the rules found in either Notice 2005-1 or the final regulations
  • Continues the good faith compliance rule for issues not addressed in Notice 2005-1 or other applicable guidance
  • Delays the requirement that the plan must be in writing until Dec. 31, 2008
  • Treats compliance with the final regulations as "good faith" compliance
  • Permits new payment elections on or before Dec. 31, 2008 for both the time and form of payment provided the election does not apply to amounts otherwise payable in the year of the election
  • Allows the cancellation and reissuance of stock options on or before Dec. 31, 2008, where the stock options violated Section 409A due to the exercise price being set below the fair market value of the stock at the time of the grant.

This full one-year extension had been requested in writing by 96 of the most prominent U.S. law firms (including Waller Lansden). The IRS acknowledges in the Notice that this new relief resulted from the efforts of the law firm consortium. While the new relief is much needed and will help employers to comply with Section 409A, employers should nevertheless be taking action to ensure that they will comply with all necessary requirements by Dec. 31, 2008. It will take a significant amount of time to review all arrangements that may provide for deferred compensation to determine how they are affected by the final regulations and what modifications must be made to the plans or arrangements. We recommend that employers take the following steps to help ensure compliance with the new rules:

  • Identify each plan or agreement that may fall within the broad reach of Section 409A and any related funding arrangement. For larger organizations, this process should involve educating in-house counsel, human resources personnel, officers and managers who may craft and/or approve employment agreements. It may not be possible in a large organization for one department or office to be aware of all employment or side agreements that exist within the organization; therefore, education of appropriate management personnel is an important part of this first step to compliance. Smaller organizations also will require internal communication and coordination.
  • Once each arrangement is identified, work with company counsel or employee benefits attorney to ascertain the areas of noncompliance and prepare necessary amendments to bring the plans into compliance with the final regulations.
  • Obtain approval of the individual or group of individuals whose consent is necessary to amend each plan or arrangement. Generally, this will be the board of directors or the compensation committee. In some cases, the company will not be able to unilaterally amend the agreement or arrangement, but will have to seek employee approval. This process will require the education of the employees and a timely presentation of the requisite changes to them.
  • Review any option grants to make sure that if any need to be corrected because of a below market exercise price, they will be timely "fixed" under the notice.

For more information, you may refer to our prior guidance on Notice 2006-79 or the final regulations.

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.