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IRS Issues Further Section 409A Relief

Coming close on the heels of Notice 2007-78 – which extended the deadline for amending nonqualified deferred compensation arrangements to reflect the requirements of Internal Revenue Code Section 409A – the IRS has now issued three additional Notices granting further relief in this area.


Notice 2007-86 extends by one year many of the transition rules that were not extended by Notice 2007-78. For instance, employers will now have until December 31, 2008, to take advantage of the following Section 409A transition rules:

  • Participants in nonqualified plans may be allowed to make a new distribution election during 2008, so long as that election does not either defer a payment that would otherwise be due in 2008 or accelerate into 2008 a payment that would otherwise be due in a later year.
  • Distribution elections under a nonqualified arrangement, such as a SERP, may continue to be “linked” to a distribution election made by the same individual under a qualified retirement plan.
  • Discounted stock options with no specified exercise date may be either replaced with non-discounted stock options or amended to specify an exercise date.

In addition, Notice 2007-86 extends the “good faith compliance” standard through the end of 2008. The final regulations will now be fully effective as of January 1, 2009. The IRS notes that compliance with either the final regulations (as issued in April of 2007) or Notice 2005-1 will be deemed to constitute good faith compliance. During 2008, however, this will not be true of compliance with the proposed regulations.


The IRS has also issued further guidance on the tax reporting aspects of Section 409A. Notice 2007-89 generally extends the reporting rules that were announced in Notice 2006-100 for the 2005 and 2006 tax years. Thus, there is no requirement that W-2s issued for 2007 show the amount of deferrals subject to Section 409A. However, any amounts required to be included in taxable income due to a violation of Section 409A must be reported on a 2007 W-2 (in Box 12, using Code Z).


Finally, in Notice 2007-100, the IRS has announced a limited voluntary correction program for operational violations of Section 409A. This Notice is divided into three portions. One portion deals with violations that are properly corrected within the same tax year, another limits the penalty attributable to minor operational failures occurring in tax years before 2010, and the other outlines an ongoing correction program for larger violations. The IRS has specifically requested comments on this ongoing corrections program.