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Issue 62 ▪ May 25, 2007
Final 409A regulations require action now
Final regulations under Section 409A – the tax code provision dealing
with the taxation of “deferred compensation” – were issued by the IRS
on April 17. The regulations, which take effect on January 1, 2008, require
employers to analyze a wide range of compensatory arrangements to
evaluate whether and how they will be affected. Companies should use
the remainder of 2007 to bring their plans into compliance with either
the rules or an exemption, and to determine whether to take advantage
of the opportunity remaining in 2007 to redesign plans and renegotiate
existing agreements. This is a major shift for employers who have been
in a “good-faith compliance” mode since 2005.
Employers will be required to seek compensation committee approval of
amendments to affected arrangements and to document and communicate
changes to plan participants, all by December 31, 2007. The rules impact
both plan design and plan compliance and require companies to incorporate
appropriate language in plan documents. A theme that runs through
the regulations is that the proper drafting of plan language is important.
Although companies have about seven months to do this work, employers
should be wary of any “quick fixes” (such as adopting uniform plan language
for all plans). This is a job that must be done carefully.
In general, the final regulations contain more flexibility than the proposals,
and some compensation arrangements (for example, qualified retirement
plans and non-discounted stock options) either automatically comply
with an exemption from Section 409A or can be easily structured to comply
with an exemption or the final rules. Other awards, such as severance
payments, may require a more sophisticated analysis.
This Perspective provides an overview of Section 409A and the impact of
the final regulations on nonqualified compensation deferral plans, equity
plans, severance plans and other post-employment benefits. We also
provide a list of action steps for 2007. Unique issues relating to retirement
plans (including SERPs, 401(k) mirror plans and restoration plans) are
beyond the scope of this Perspective. | 
