Tax Article - Final Deadline for Compliance with 409A is December 31, 2008

Congress passed a rather broad piece of legislation in 2004 otherwise known by its Internal Revenue Code section, 409A. This provision is considerably broad and complex in its application and a failure to comply with its complex provisions could result in penalties including a 20% penalty on certain nonqualified deferred compensation payments. The penalty is imposed on the employee. Other employee benefit plans not generally considered deferred compensation may be covered under section 409A. Covered plans may include; stock options, bonus plans, non qualified retirement plans, severance agreements, and change in control agreements. For example, something as simple as a year-end bonus that is paid after March 15 of the following year could trigger this penalty. In the case of a year-end bonus, the bonus should be expressed in writing with a specific payment date. If the payment is not made by that date but in the same taxable year, the penalty generally would not apply. 

Employees who wish to defer receipt of compensation that will be earned in 2009 must make a deferral election by December 31, 2008. The IRS issued Notice 2007-86 extending important transition relief for permitted changes to the form of payment election and the time of the payment of previously deferred compensation such that changes may be made until December 31, 2008. For the three basic requirements under 409A, please refer to the full article. We urge you to contact your lawyer if you have any compensation plans whereby payment may be deferred. 

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

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

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