Section 409A was recently added to the Internal Revenue Code to regulate deferred compensation programs more tightly. The reach of the new law is very broad and even affects stock option programs and many employment agreements. Comprehensive regulations were issued in April 2007 and promise to bring significant if not sweeping changes to the deferred compensation programs of nearly all employers. As it stands today, the deadline for compliance with these regulations is Dec. 31, 2007. More information on these regulations is available here.

On Aug. 21, 2007, a letter to the IRS commissioner was submitted by a consortium of 92 law firms nationwide, including Waller Lansden. A copy of the letter is available here. The message is a simple: extend the compliance deadline for Section 409A to Dec. 31, 2008.

Many practitioners complain privately that the 2007 deadline allows insufficient time for companies to make numerous compensation decisions and adopt 409A compliant documents. The purpose of the letter was to publicize those private complaints. The letter made these points:

  • The broad reach of Section 409A is generating high-level compensation policy issues for most companies that deserve significant internal consideration.
  • Companies have recently adopted corporate governance processes that include stringent requirements for deliberating on executive compensation decisions.
  • Attempts to comply with the 2007 deadline have already resulted in undue strain on resources of companies and their service providers (attorneys, actuaries, compensation consultants, accountants, etc.).
  • Legal analysis of the rules is evolving. Final regulations were published less than nine months before the compliance deadline and include many issues that are still being debated by leading practitioners. Many topics continue to be under consideration by the IRS.
  • Many companies have literally hundreds of interrelated deferred compensation arrangements, each of which must be collected and analyzed. Many 409A compliance changes also will involve federal and state securities law analysis and assessment of financial reporting under complex accounting standards.
  • Tax consequences fall most heavily on individual employees, many of whom have no involvement with this process and will have no opportunity to avoid penalties that result from incomplete compliance.

The letter makes a special plea for the small business community. Many small businesses may not have the same internal and external resources for compliance as large companies and appear to be largely unaware of the complexities of Section 409A. The cost of compliance will be difficult and possibly disproportionate to those in small business.

In addition, the letter urges the IRS to (i) solicit practitioner input on simplified methods for compliance, including compliance on a "bulk" basis, and (ii) adopt the recommendation of the Section of Taxation of the American Bar Association to develop a voluntary correction program for inadvertent Section 409A violations.

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