Although more than 90 of the country's most prominent law firms have sought to persuade the IRS to extend for one year the deadline for compliance with new Code Sec. 409A regulations, IRS officials continue to maintain that they have no intention of offering an extension.

As a result, employers must act diligently in reviewing current plans and complying with the new 409A regulations because the new rules take effect December 31, 2007. The costs of noncompliance are high. Thus, employers only have until the end of the year to adopt amendments.

The new rules

New Code Sec. 409A generally applies to most nonqualified deferred compensation arrangements, which allow employees to defer compensation into a future tax year. Common examples include supplemental executive retirement programs, incentive bonus programs, stock options, stock appreciation rights, and severance agreements. All arrangements potentially subject to Section 409A must either file an exemption or comply with detailed requirements that the IRS has issued earlier this year.

Cost of noncompliance

All deferred compensation arrangements that do not qualify for an exception must be fully compliant with the new rules under Code Sec. 409A after Dec. 31, 2007. Failure to comply with the new IRS rules may create serious financial consequences and tax liabilities for employees. For instance, amounts deferred under a nonqualified deferred compensation plan that does not comply with the new regulations will be includible in an employee’s income. Further, interest on that income will be imposed at a rate higher than the interest rate on tax underpayments. On top of this, a 20 percent penalty will be imposed.

Our firm can help your plan comply with the new regulations issued under Code Sec. 409A. We would be happy to discuss your options for compliance.