Deferred Compensation Plan (Section 409A) Compliance Period Extended Until December 31, 2007

The IRS yesterday issued long-anticipated transition guidance (Notice 2006-79) as to the implementation of the new deferred compensation plan rules under Section 409A of the Internal Revenue Code. As noted in prior Morgan Lewis LawFlashes, Section 409A was added to the Internal Revenue Code in the fall of 2004 and imposes a variety of restrictions on nonqualified deferred compensation arrangements with such restrictions effective, in general, on and after January 1, 2005. Deferred compensation arrangements that violate the Section 409A requirements result in the imposition of a 20% additional tax on the individual benefiting from the arrangement, as well as regular income tax liability and a possible penalty interest assessment. As discussed below, under prior interim guidance, the 409A compliance period had been scheduled to expire as of December 31, 2006.

Notice 2006-79 extends the operational compliance and document revision deadlines to December 31, 2007, with the expectation that final Section 409A regulations will be issued in the fall of 2006. The Notice provides welcome relief to sponsors of nonqualified deferred compensation arrangements by extending the compliance deadline until December 31, 2007. However, the Notice imposes a much stricter deadline (December 31, 2006) for remedial action with respect to certain below-market option grants made to executive officers of publicly held companies.

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