United States: IRS Delays Some Requirements Of Code Section 409a

On August 21, 2007, Bracewell & Giuliani LLP, along with 91 peer law firms across the U.S., issued a letter to the IRS requesting an extension of the deadline for amending deferred compensation plans, agreements and arrangements required to comply with Internal Revenue Code Section 409A (Deferred Compensation Plans). The letter requested an extension to December 31, 2008 to bring plan documents into compliance with Code Section 409A and also requested an extension of the transition relief period until December 31, 2008.

On Monday, September 10, 2007, the IRS, in response to the joint request, issued Notice 2007-78 which delays only certain documentary compliance requirements until December 31, 2008, but does not extend the transition relief period past December 31, 2007.

For 2007, as long as an employer is operating and administering its Deferred Compensation Plans in accordance with the guidance previously issued by the IRS with respect to Code Section 409A, including the Final Regulations issued in April, 2007, and for 2008, as long as the employer operationally complies with the Final Regulations, such employers have until December 31, 2008 to amend their Deferred Compensation Plans to comply with Code Section 409A.

All Deferred Compensation Plans must specify the time and form of payments by December 31, 2007. Under the transition relief previously issued by the IRS, if an employer desires to change a time and form of payment, which can only apply to amounts that would not otherwise be payable in 2007, the decision to make such changes and, most importantly, the amendment to effect such changes, must be made by December 31, 2007.

Notice 2007-78 gives guidance with respect to amending "good reason" termination provisions in an attempt to comply with the safe harbor conditions for good reason contained in the Final Regulations to provide for a substantial risk of forfeiture. Notice 2007-78 states that if a "good reason" termination of employment by an employee does not currently provide a "substantial risk of forfeiture" then any modification of the conditions of a good reason termination (an addition or removal of a condition) in an attempt to create a substantial risk of forfeiture will not cause such good reason termination to be treated as subject to a substantial risk of forfeiture. This means that if an employer has good reason termination provisions in its Deferred Compensation Plans, and such good reason conditions do not satisfy the safe harbor conditions for good reason listed in the Final Regulations and the employer is not secure in its belief that such good reason conditions will be treated as a substantial risk of forfeiture, then the employer cannot amend its Deferred Compensation Plans to add or remove good reason conditions in an attempt to ensure that the good reason conditions will be treated as a substantial risk of forfeiture.

The Notice also indicates that the IRS will create a limited voluntary correction program with respect to Code Section 409A. While such a program should be beneficial, Notice 2007-78 states that it will only apply to unintentional operational failures in limited situations. It is not anticipated that such program will address correcting failures relating to the form of the Deferred Compensation Plan document.

IRS Circular 230 Disclosure:As required by United States Treasury Regulations, you should be aware that this communication is not intended or written by the sender to be used, and it cannot be used, by any recipient for the purpose of avoiding penalties that may be imposed on the recipient under U.S. federal tax laws.

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