On October 22nd, the IRS announced in Notice 2007-86 that it is further extending the transition relief under Section 409A of the Internal Revenue Code for nonqualified deferred compensation arrangements (generally referred to in this article as "plans"). The extension generally permits plans to be operated through December 31, 2008 in good faith compliance with Section 409A, as long as the plans are amended on or before December 31, 2008 to comply with Section 409A. This extension is a more complete extension than the IRS previously granted in Notice 2007-78, which required some plans to be amended by the end of 2007. The new notice rescinds this requirement and instead provides until December 31, 2008 for all plans to be amended.
Notice 2007-86 extends the deadline for amending plans subject to Section 409A to December 31, 2008. Plans must be amended to comply with Section 409A effective from January 1, 2009 forward. Plans generally do not need to be amended to reflect the manner in which the plans were operated before January 1, 2009. Therefore, plans that are fully paid out before January 1, 2009 need not be amended to comply with Section 409A, but they must be operated in reasonable, good faith compliance with Section 409A.
Notice 2007-86 also extends the good faith compliance period for plans subject to Section 409A. During the good faith compliance period, a plan is considered to comply with Section 409A, even if it is not amended to comply with Section 409A, as long as it is operated in reasonable, good faith compliance with Section 409A. After December 31, 2007, operational compliance with the final regulations issued under Section 409A will constitute reasonable, good faith compliance with Section 409A, but operational compliance with the proposed regulations will not.
In general, the Notice also extends through December 31, 2008 the transition relief previously granted for 2006 and 2007. Specifically, this transition relief allows participants or companies to make new elections (subject to certain limitations) for previously deferred compensation as to both the time and form of payment. This transition relief generally recognizes that many of the timing and form of payment provisions contained in existing plans may not be suitable in the future given the new restrictions imposed by Section 409A. In addition, the transition relief provided for payment elections under a nonqualified deferred compensation plan that are linked to payment elections made under a qualified plan continues through the end of 2008 and also continues to apply to payment elections linked to 403(b) plans, 457(b) eligible plans and certain foreign broad-based plans.
Notice 2007-86 also generally extends to December 31, 2008, the ability to cancel a discounted stock option or stock appreciation right ("SAR") that is subject to Section 409A, and replace it with a non-discounted stock option or SAR that is not subject to Section 409A. Notice 2007-86 also generally extends to December 31, 2008, the ability to amend a discounted stock option or SAR to provide timing and form of payment requirements that comply with Section 409A. Due to recent concerns regarding the "backdating" of stock options, however, transition relief was not extended (i.e., it expired on December 31, 2006) for discounted grants made to Section 16 officers and directors of public companies that were not properly or timely reported on financial statements or other reports. For non-discounted stock options or SARs granted on or after January 1, 2008 that are intended to be exempt from Section 409A, fair market value must be determined in accordance with the final regulations.
Notice 2007-86 also does not provide any new transition relief for nonqualified deferred compensation arrangements maintained pursuant to one or more collective bargaining agreements in effect on October 3, 2004. Those arrangements continue to be exempt from compliance with Section 409A until the earlier of (i) the date on which the last of such agreements terminates (determined without regard to any extension after October 3, 2004), or (ii) December 31, 2009.
While the requirement to amend plans, policies and agreements to come into compliance with Section 409A has been extended until the end of 2008 as a result of Notice 2007-86, we continue to recommend that our clients identify and amend such plans, policies and agreements as soon as possible. The new rules of Section 409A and the final regulations are complex, and having properly amended plans, policies and agreements will better assist you in complying with the final regulations in 2008.
The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.