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Employee Benefits - October 2006.

Article Excerpt
EXECUTIVE COMPENSATION: RECENT DEVELOPMENTS

IRS announced a compliance extension for Section 409A regulations until January 1, 2008. IRS has announced that final regulations under Code Section 409A, applicable to nonqualified deferred compensation plans, will not be effective until January 1, 2008. IRS Notice 2006-79, issued October 4, 2006.

The transition relief provided by the 2005 proposed regulations is also extended through 2007 except with respect to certain discounted stock rights subject to backdating concerns. Additional transition relief is provided for certain payment elections in "linked plans" and certain collective bargaining arrangements. Under the transition relief, employers have until the end of 2007 to amend agreements to bring them into compliance with Section 409A. The transition relief is also extended for certain plans that took advantage of transition relief for 2005.

The long-awaited final regulations under Section 409A are expected by the IRS to be issued later this year. The IRS also expects to issue initial guidance on income tax reporting and withholding and Section 409A penalty assessments.

Good faith operational compliance with the statutory requirements of Section 409A continues to be required. Until the anticipated January 1, 2008, effective date of the final regulations, compliance with the initial Section 409A guidance contained in IRS Notice 2005-1, the proposed regulations, or the final regulations will constitute reasonable, good faith compliance with the statute. Deferred amounts that were earned and vested before January 1, 2005, are generally "grandfathered" unless the previous arrangement has been materially modified.

Notice 2006-79 reiterates the prior position of the IRS that a Section 409A violation might affect the entire plan or only the affected participant. As an example, if the employer, with respect to any plan participant, exercises discretion to delay or extend payments of nonqualified deferred compensation in a manner that violates Section 409A, the entire plan is in violation. However, if an individual participant exercises a right...

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