US Government Extends Transitional Relief For Deferred Compensation Plans

by Mike Godfrey, Tax-News.com, Washington

23 October 2007

The US Treasury Department and the Internal Revenue Service have announced that the transition relief for compliance with the final regulations under section 409A of the Internal Revenue Code (409A) has been extended generally for one year.

Section 409A became effective on January 1, 2005, and all affected nonqualified deferred compensation plans have been required to comply with the statute since that date. Under prior guidance, these plans were required to comply in operation with the final regulations beginning in 2008.

Notice 2007-86, issued Monday, generally extends the transitional period for compliance with the final regulations to December 31, 2008. The notice also confirms that the Treasury Department and the IRS expect to issue guidance regarding a correction program as soon as possible.

Section 409A generally provides that unless certain requirements are met, amounts deferred under a nonqualified deferred compensation plan for all taxable years are currently includible in gross income, to the extent that they are not subject to a substantial risk of forfeiture and have not been previously included in gross income.

Section 409A also includes rules applicable to certain trusts or similar arrangements associated with nonqualified deferred compensation, where such arrangements are located outside of the United States or are restricted to the provision of benefits in connection with a decline in the financial health of the sponsor.

The regulations provide guidance regarding the requirements for deferral elections and payment timing under section 409A. The regulations were in response to legislation enacted by Congress in 2004 to address concerns involving reported abuses of nonqualified deferred compensation plans.

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