Tax Article - Transition Relief for Section 409A

Section 409A was added by the American Jobs Creation Act of 2004. Section 409A provides rather harsh penalties for failure to comply with certain requirements in connection with nonqualified deferred compensation plans. The IRS provided guidance on December 20, 2004, under Notice 2005-1 and issued proposed regulations on October 4, 2005. The preamble to the proposed regulations extended certain transitional guidance provided in Notice 2005-1, generally through December 31, 2006. The proposed regulations set the effective date of the final regulations at January 1, 2007. Although Treasury and the IRS expect to issue final regulations in 2006, the Treasury and IRS felt that this was insufficient time for taxpayers and their representatives to analyze the final regulation and come into compliance by January 1, 2007. Accordingly, Notice 2006-79 was issued on October 4, 2006, extending the effective date for the final regulations to January 1, 2008.

In extending the effective date of the final regulations, Notice 2006-79 provides additional transition relief through December 31, 2007. This transitional relief includes provisions allowing plans to continue to be treated as in compliance with 409A if they are operated through December 31, 2007, in reasonable, good faith compliance with the provisions of 409A and applicable provisions in Notice 2005-1 as well as other guidance published with an effective date prior to January 1, 2008, and the plan is amended by December 31, 2007, to conform to 409A and the final regulations. Prior to Notice 2006-79, plans had to be amended by December 31, 2006, to conform to the final regulations. 

In addition, transition relief is provided under Notice 2006-79 to allow changes in payment elections or conditions on or before December 31, 2007. Under this provision, a plan may provide, or be amended to provide, for new payment elections on or before December 31, 2007, with respect to both the time and form of payment of amounts subject to 409A. With respect to elections made in 2006, the election or amendment may apply only to amounts that would not otherwise be payable in 2006 and may not cause an amount to be paid in 2006 that would not otherwise be payable in 2006. Similar rules apply with respect to elections made in 2007. The Notice provides an example where an amount payable upon separation from service that would otherwise be payable in 2006 may not be changed if the service provider separated from service in 2006. In addition, short term deferrals that are payable in a subsequent year will qualify for this deferral election. 

Transition relief is also provided to allow, with certain exceptions involving publicly traded stock, substitutions of non-discounted stock options and stock appreciation rights for discounted stock options and stock appreciation rights to bring such stock options and stock appreciation rights outside the scope of 409A. 

409A Regulations; Basic Requirements (November / December 2007)

409A Proposed Regulations; Calculating the Penalties (May / June 2009)

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