Employee Benefits & Executive Compensation Benefits Alert – Summer 2007
At Last! Final Regulations for Nonqualified Deferred Compensation Plans
After much anticipation, the Internal Revenue Service issued final regulations under Section 409A of the Internal Revenue Code providing guidance for nonqualified deferred compensation arrangements. The final regulations substantially follow the guidance set forth in the proposed regulations issued in October 2005. While the general regulatory structure in the proposed regulations was retained, specific concerns of practitioners were addressed and the rules in several areas were liberalized.
In general, Section 409A imposes requirements on nonqualified deferred compensation arrangements to specify the timing of distributions, prohibit the acceleration of benefits, and require that deferral elections be made within certain time frames. Failure to satisfy these requirements will result in immediate income taxation to the executive of all amounts deferred under the arrangement, plus a 20% additional tax and interest, even if amounts are not currently payable under the plan.
Section 409A also applies to any nonqualified arrangement for the deferral of compensation. An arrangement provides for the deferral of compensation if the executive has a legally binding right during a taxable year to compensation that is or may be payable to the executive in a later taxable year.
A wide variety of deferred compensation arrangements may be affected by these regulations. Nonqualified deferred compensation arrangements may include performance-based compensation, equity-based compensation (e.g., stock options, stock appreciation rights, and other equity-based compensation), restricted property, separation pay plans and window programs, indemnification and liability insurance plans, legal settlements, certain educational benefits, or bonus arrangements.
The IRS has separately issued guidance on the impact of Section 409A on split dollar life insurance arrangements.
Deadline for Plan Amendments. Plans must be amended in written form to conform to the requirements of Section 409A and the final regulations no later than December 31, 2007.
If you would like to discuss how these changes will impact your company’s nonqualified deferred compensation arrangements, please contact one of the members of our Employee Benefits team.
The contents of this publication are intended for general information only and should not be construed as legal advice or a legal opinion on specific facts and circumstances. Copyright 2023.