IRS Extends Section 409A Document Compliance Due Date Until December 31, 2008 with Significant Limitations; Action Required by December 31, 2007

On Monday, September 10, in Notice 2007-78 (the Notice), the IRS granted companies sponsoring deferred compensation plans limited additional transition relief for bringing documents into compliance with section 409A of the Internal Revenue Code of 1986, as amended (the Code). However, the relief granted in the Notice falls well short of the full one-year extension requested by numerous law firms and business groups. Instead, the Notice requires largely permanent election and documentation of applicable payment provisions by December 31, 2007 and extends only the deadline for documentation of plan details from December 31, 2007 to December 31, 2008, subject to significant conditions described below.

Section 409A of the Code imposes a number of complex substantive and procedural requirements on deferred compensation plans, which, under some circumstances, include severance plans, equity compensation plans, executive employment agreements, and other arrangements that do not fall within the typical scope of a deferred compensation plan. Violations of section 409A may cause imposition of a 20% additional income tax to the employee, in addition to income tax at ordinary rates on the income in question, and incremental interest.

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