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IRS Grants Further Relief Under Section 409A

With the December 31, 2006, amendment deadline fast approaching – and with no final regulations in sight – the IRS has again extended the deadline for documentary compliance with the requirements of Section 409A of the Internal Revenue Code. Notice 2006-79 extends this deadline by another full year, to December 31, 2007.

Sponsors of nonqualified deferred compensation plans will appreciate this additional time to bring their plans into compliance with the new rules. For one thing, we are still awaiting final regulations. Though the regulations proposed by the IRS in the fall of 2005 give a good indication of how the IRS interprets the statutory provisions, they leave many questions unanswered.

According to the recent Notice, the IRS anticipates that final Section 409A regulations will be issued by the end of 2006. Nonetheless, the IRS expects that those regulations will not be effective until January 1, 2008. Sponsors of nonqualified plans may thus continue to comply with a good-faith interpretation of the statutory language (as amplified by the IRS in its Notice 2005-1) through the end of 2007. In general, compliance with either the proposed regulations or the final regulations (once they are issued) will also constitute good-faith compliance with the statute.

Notice 2006-79 also extends most of the transition relief that was granted in the proposed regulations. Thus, as with the earlier transition relief for 2006, the Notice provides that a plan may be amended by December 31, 2007, to provide for new payment elections to be made during 2007 – so long as such elections (1) do not apply to amounts that would otherwise be payable during 2007, and (2) do not cause an amount to be paid during 2007 that would not otherwise be payable during that year. The Notice makes clear that such an election may even apply to amounts that were previously subject to a payment election made under the transition relief granted in the proposed regulations.

Similarly, the Notice extends to December 31, 2007, the ability to link a payment election made under a nonqualified plan to an election made under a qualified plan. This relief was even broadened to apply to payment elections made under Section 403(b) plans, Section 457(b) plans, and certain broad-based foreign plans.

While this additional Section 409A relief will be welcomed by many nonqualified plan sponsors, they will want to keep in mind that the constraints imposed by Section 409A have been in effect since January 1, 2005. This extension of the deadline for amending plans to comply with those constraints should not be seen as a license to disregard the statute altogether. Rather, nonqualified plans must be operated in accordance with a good-faith interpretation of the statutory provisions even prior to adoption of appropriate amendments. Because this task may be easier if the provisions are reflected in the plan documents, sponsors may wish to proceed with appropriate amendments at this time.