The Proposed Nonqualified Deferred Compensation (§ 409A) Regulations

Originally published October 4, 2005

On September 29, 2005, the Internal Revenue Service issued proposed regulations on the deferred compensation rules under Internal Revenue Code ("Code") section 409A. Section 409A was added to the Code by the American Jobs Creation Act of 2004 and provides that amounts deferred under nonqualified deferred compensation plans are currently includable in gross income and are subject to an additional 20% tax unless certain requirements are met. The IRS issued initial guidance on Code section 409A and provided transitional rules last December in Notice 2005-1. The proposed regulations generally incorporate the rules in Notice 2005-1 and provide substantial additional guidance concerning the plans subject to Code section 409A, the operational requirements for deferral elections and the permissible timing of deferred compensation payments.

The proposed regulations address numerous issues of significant interest to employers, including:

• An extension of time until December 31, 2006 to amend plans to conform to Code section 409A.

• An extension of time until December 31, 2006 to make changes to the timing and form of payments without violating Code section 409A, provided the changes do not apply to amounts otherwise payable in 2006.

• An extension of the transition rule until December 31, 2006 allowing the time and form of payment elections under a nonqualified deferred compensation plan to be controlled by elections under a qualified plan.

• Stock appreciation rights (SARs), including SARs payable in cash and SARs of privately held companies, are generally not subject to Code section 409A.

• Many common severance arrangements, including many broad-based severance arrangements, are generally not subject to Code section 409A.

However, the transition relief allowing plans to be terminated and deferrals to be cancelled during 2005 was not extended into 2006. Thus, with limited exceptions available under the proposed regulations, actions to terminate or partially terminate plans or cancel deferral elections must be completed by December 31, 2005, and related amendments must be adopted by that date as well.

Click here to view Sutherland's full legal alert that describes the proposed regulations in more detail. For more information on section 409A, visit Sutherland's 409A Web site. The Web site contains links to the section 409A statutory language and legislative history, previously issued IRS guidance, and Sutherland legal alerts on nonqualified deferred compensation. Please contact us if you have any questions regarding the proposed regulations on deferred compensation.

© 2005 Sutherland Asbill & Brennan LLP. All Rights Reserved.

This article is for informational purposes and is not intended to constitute legal advice.