As described in our October 2004 and December 2004 Client Alerts, the American Jobs Creation Act of 2004 added Section 409A to the Internal Revenue Code. Section 409A substantially changed the federal income tax treatment of nonqualified deferred compensation ("NQDC") arrangements maintained by employers and other entities that receive services from employees, partners, directors, and other individuals.
The IRS recently extended to December 31, 2007 both the deadline for adopting written plan amendments to bring NQDC arrangements into compliance with Section 409A and the period during which NQDC arrangements may be operated in good faith compliance with Section 409A. The IRS also extended until December 31, 2007 the period during which an NQDC arrangement may permit new elections to be made with respect to time and form of payment. However, certain restrictions apply to election changes that would affect amounts otherwise payable in 2006 or 2007 or that would accelerate payments to those years.
In addition, until December 31, 2007, discounted stock options and discounted stock appreciation rights ("SARs") that do not have a fixed exercise date may be amended to provide for a fixed exercise date, or may be cancelled and replaced with nondiscounted stock options and SARs as long as there is no current payment made in connection with such replacement. However, discounted stock options and discounted SARs issued to Section 16 reporting persons by publicly-traded companies are generally not covered by this extension and therefore must be amended, or cancelled and replaced, by December 31, 2006.
The IRS noted that while it expects to issue final Section 409A regulations before the end of 2006, the regulations will not become effective until January 1, 2008. Lastly, IRS officials have indicated that the Section 409A withholding and reporting requirements which were previously suspended as described in our December 2005 Employee Benefits Update are expected to be effective for the 2006 calendar year and that guidance regarding those requirements should be issued by year-end.
Goodwin Procter LLP is one of the nation's leading law firms, with a team of 700 attorneys and offices in Boston, Los Angeles, New York, San Diego, San Francisco and Washington, D.C. The firm combines in-depth legal knowledge with practical business experience to deliver innovative solutions to complex legal problems. We provide litigation, corporate law and real estate services to clients ranging from start-up companies to Fortune 500 multinationals, with a focus on matters involving private equity, technology companies, real estate capital markets, financial services, intellectual property and products liability.
This article, which may be considered advertising under the ethical rules of certain jurisdictions, is provided with the understanding that it does not constitute the rendering of legal advice or other professional advice by Goodwin Procter LLP or its attorneys. © 2006 Goodwin Procter LLP. All rights reserved.
