Employers are reminded that all plans, arrangements or agreements (other than tax-qualified retirement plans) that defer compensation must fully comply with the final regulations under Internal Revenue Code Section 409A by December 31, 2008!
Section 409A applies to any plan or agreement (whether formalized in writing or not) whereby an employee or service provider obtains a legally binding right in one tax year to compensation that will be paid more than 2 1/2 months after the end of that tax year. Thus, not only does Section 409A apply to traditional “nonqualified deferred compensation” arrangements such as top-hat plans, supplemental executive retirement programs, option plans and long-term incentive plans, but it may also apply to more common arrangements such as bonus plans, severance agreements or employment agreements.
Failure to comply with Section 409A (either in form or in operation) results in (i) early taxation of the amounts deferred, (ii) interest at 1% over the federal underpayment rate, and (iii) a 20% penalty. Therefore, plan sponsors who have not already done so are strongly encouraged to review all existing plans or arrangements that could possibly result in a deferral of compensation so that they may (i) determine whether those plans or agreements are subject to Section 409A, and (ii) amend them to bring them into compliance with Section 409A, by the end of the year.