Initial 409A Guidance Issued Providing Liberal Transition Relief for Deferred Compensation Plans

On December 20, 2004, the Internal Revenue Service released its initial guidance concerning the recently enacted federal tax laws affecting nonqualified deferred compensation plans. Contained in the American Jobs Creation Act enacted earlier this year, Section 409A of the Internal Revenue Code imposes burdensome new requirements on deferred compensation and other executive compensation arrangements, including new requirements with respect to elections to defer base salary and bonuses, and elections with respect to distributions. The new law applies to deferral arrangements with employees and independent contractors, including board members.

Although the new law generally applies with respect to amounts deferred after December 31, 2004, it can be applicable to deferred amounts that were unvested as of December 31, 2004, regardless of when the deferral election was made, and in that respect has significant potential for retroactive application. The guidance released by the IRS in Notice 2005-1 (i) clarifies that nothing needed to be done by the end of 2004 to comply with the new law, (ii) explains how to implement the new requirements during 2005, and(iii) provides other guidance that will assist plan sponsors in complying. Additional guidance on the new law is expected to be released in 2005.

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