WRITTEN PLAN REQUIREMENTS FOR DEFERRED COMPENSATION DELAYED UNTIL 2009

Employers regularly adopt plans or agreements to pay compensation to one or more employees at a later point in time. Usually, the employees don't want to be taxed at the time the agreement is entered into, but only when the compensation is paid (well, they probably NEVER want to be taxed, but clearly prefer waiting until payment at least). Various provisions of the Internal Revenue Code may affect the ability to "defer" income taxation on such compensation.

One of the newest provisions is Code Section 409A, which applies to nonqualified plans (that is, deferred compensation arrangements that do not meet the specific Code requirements for retirement/deferred compensation payouts). Under Code Section 409A , all amounts deferred under a NQDC plan are currently includible in income to the extent not subject to a substantial risk of forfeiture and not previously included in gross income, unless the plan (a) meets certain stated distribution, acceleration of benefit, and election requirements, and (b) is operated in accordance with these requirements.

In 2007, the IRS issued regulations under Code Section 409A that required that all plans be in writing and contain requirements provided for in those regulations. Initially, it gave taxpayers until January 1, 2008 to get compliant plans in place.

Acknowledging that this was too quick a deadline, the IRS has now extended the written plan deadline until December 31, 2008. Taxpayers have until that date to adopt a fully complying written plan if (1) the plan is operated in accordance with the requirements of Section 409A and applicable regulations and guidance through that date, and (2) the plan is amended on or before December 31, 2008 to comply retroactively to January 1, 2008. However, to use this extended time period, taxpayers must still comply with certain written designation of a time and form of payment requirements by January 1, 2008.

Undoubtedly, there are numerous employers who may have plans or agreements as to paying deferred compensation but who are not aware of Code Section 409A and/or its written plan requirements. If there is any question, such employers should consult with their tax counsel soon to determine whether they come within Code Section 409A, and if yes, to assist with the preparation of a complying written plan.

Notice 2007-78