409A Rules Deferred One Year; Now Get Cracking

The Treasury Department may have given—finally—a much-needed extension to compliance with final Section 409A regulations on deferred compensation. But that doesn’t mean companies should slow their compliance efforts, experts warn.

The Treasury Department and the Internal Revenue Service granted the one-year extension last week, after pleas for more time from Corporate America and its legal counsel. The dense maze of tax regulations were slated to go into effect at the end of this year, risking considerable tax penalties for non-compliance. The new deadline is Dec. 31, 2008.

Capwell

Jeffrey Capwell, a partner in the law firm McGuire Woods, hails the move as “very good news [that] provides employers an additional year to consider how to modify or revise their plans in operation and in form to comply with 409A.”

Companies have been grappling with the complicated regulations, which cover a broad range of compensation arrangements and plans, since their issuance in proposed form in 2005. Final regulations, however, weren’t available until last April, eight months before the effective scheduled date. Corporate lawyers quickly said they could never sift through all their compensation plans in so short a time.

In September, the Treasury and IRS had granted a one-year extension on documenting Section 409A compliance, but still required companies to be in operational compliance with the rules by the end of this year. Last week’s announcement, IRS Notice 2007-86, threw in the towel on that goal too. The Treasury and the IRS also confirmed that they plan to issue guidance regarding a correction program “as soon as possible.”

Collins

“This is definitely welcome news,” says Michael Collins, of the law firm Gibson Dunn & Crutcher. “The limited relief issued last month was much less than companies needed. The IRS responded very quickly with much more generous relief.”

Collins says the extension “is helpful because it allows more time for best practices to develop … companies are still kicking around how to deal with certain provisions.” It also allows companies more time to make amendments to their plans to comply with the final rules, he says.

Now Get to Work

Collins and others, however, quickly caution that companies shouldn’t slow their compliance efforts.

“The final regs haven’t changed, so if companies have things ready to go now, there’s no down side to getting it out of the way this year,” Collins says. He adds that clients in the midst of amending their plans to comply by the original Dec. 31, 2007, deadline are still planning to do so.

Similarly, Brian Pinheiro of Ballard Spahr Andrews & Ingersoll says: “We’re telling clients who are already in the midst of their compliance effort to just get everything done this year.”

“A lot of clients have already scheduled their board meetings and some have already sent out the meeting materials,” he says. “For them, at this point, it’s silly to say ‘Hold everything and wait.’”

Pinheiro also notes that companies that want to give their directors and officers the ability to receive a distribution in 2008 still need to make their distribution elections by the end of this year.

Still, even for companies far along in their compliance efforts, experts say the extension is good news.

Pinheiro

“A lot of companies got started late and it was a fire drill to identify all their deferred compensation plans,” Pinheiro says. “Even for companies that are far along in their compliance efforts at the end of 2007, this gives them comfort that if they missed something, they have 12 more months to find it and fix it.”

Collins notes that the extended transition relief also allows employees additional time to change their payment elections. “So there’s additional flexibility even for companies that already amended their plans,” he says.

Additionally, he notes that the IRS also issued guidance waiving a requirement to report on Form W-2 deferred compensation that doesn’t violate 409A for 2007.

Collins urges compliance with the final rules next year, even though it’s not required until 2009. Says he: “It‘s automatically deemed ‘good faith compliance’ if you do, so it’s prudent to comply.”