IRS Guidance on New Nonqualified Deferred Compensation Law

Tax and Employee Benefits Alert
01.03.05

On December 20, 2004, Treasury and the IRS issued Notice 2005-1, which represents the first round of regulatory guidance on the application of the nonqualified deferred compensation restrictions in section 409A of the Internal Revenue Code. Section 409A was enacted as part of the American Jobs Creation Act of 2004.

This guidance is limited in scope, and takes the form of 38 questions and answers on the following topics: definitions and coverage; stock options and stock appreciation rights; change in control events; acceleration of payments; effective dates and transition relief; and the application of information reporting and wage withholding requirements. In addition, the Notice seeks comments on various other aspects of section 409A that Treasury and IRS intend to address in future guidance. A summary of the new guidance is attached for your information.

Section 409A of the Code is generally effective January 1, 2005, with regard to deferrals on or after that date, and imposes new rules regarding permissible distribution events and deferral/payout elections. Most employers will need to respond to the new law in 2005 in order to prevent covered employees from incurring adverse tax consequences under section 409A.

Summary of Initial IRS Guidance on Nonqualified Deferred Compensation Plans

If you have any questions about the new guidance or section 409A, please contact:

Fred Oliphant, foliphant@milchev.com, 202-626-5834

Marianna Dyson, mdyson@milchev.com, 202-626-5867

Jeanette Dayan, jdayan@milchev.com, 202-626-6037

Layla Asali, lasali@milchev.com, 202-626-5866

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