Treasury and IRS Announce Limited Extension of Section 409A Effective Date

Employee Benefits Alert

Today, the Treasury Department and the IRS issued Notice 2007-78 with an accompanying press release. This new guidance generally announces an extension to December 31, 2008 of the deadline for full, documentary compliance under section 409A.

The Notice also indicates that the Treasury and the IRS are working on issuing guidance that would provide for a limited compliance program for certain unintentional operational violations of section 409A, which would limit the amount of additional taxes due. In addition, the Notice includes some specific relief with respect to certain issues involving renewals and extensions of employment agreements and application of the cash-out rules to annuities and installment payments. Finally, the Notice indicates that the special relief from section 409A(b) provided under Notice 2006-33 with respect to certain grace period assets held in offshore rabbit trusts is not being extended.

Extension of Documentary Compliance Deadline. Employers should understand that the relief granted under the Notice is very limited, and generally does not apply to the operation of deferred compensation arrangements. Thus, under Section III of the Notice, the Treasury and IRS make it clear that they are not extending the good-faith standard that has applied under prior guidance from 2005 through the end of 2007, and plans must comply in operation with the section 409A rules in 2008.

Moreover, after December 31, 2007, except as otherwise specifically permitted by the Notice and the final section 409A regulations, taxpayers may not change the time and form of payment, and, further, no change in the time and form of payment after December 31, 2007 may result in an amount that was deferred as of December 31, 2007 qualifying for an exclusion from the definition of deferred compensation under the final section 409A regulations.

Furthermore, to qualify for the extension, taxpayers must designate in writing before January 1, 2008, a compliant time and form of payment for any deferrals under the plan as of January 1, 2008. The Notice provides some flexibility on how this written designation may be made, but points out that such designation must provide for payment on an event that is permissible under the section 409A rules, and further that the designation of a specified date or fixed schedule of payments must, with some minor exceptions, meet the requirements of Treas. Reg. § 1.409A-3(i)(1). Moreover, the Notice states that if a permissible payment event is not specified in writing by January 1, 2008, the addition of that payment event is subject to the anti-acceleration and subsequent deferral election provisions of the section 409A rules. Similarly, if a payment event is specified in writing on January 1, 2008, the removal of that payment event is subject to section 409A’s anti-acceleration and subsequent deferral election rules. There is some minor relief granted for later specifying the default or alternative definition of certain permissible payment events (e.g., separation from service), but even in those instances, the ultimate definition adopted must be consistent with the actual operation of the plan during 2008. Similarly, a plan does not have to be amended to include the 6-month delay rule for specified employees until December 31, 2008, but the amendment must be made retroactive to January 1, 2008 and must reflect the operation of the plan through the date of amendment.

Other Relief. The Notice also provides limited relief with regard to certain situations, including (1) instances in which the employer wishes to conform an existing good reason termination definition to the provisions in the final regulations, (2) the impact of extensions, renewals, or renegotiated employment agreements on payments that were conditioned on involuntary separation from service, and (3) the application of automatic cash-out provisions to annuities and installment payments. In this regard, employers may be surprised by the extremely narrow reading of the section 409A provisions by the Treasury and the IRS that form the backdrop for the relief granted.

Limited Voluntary Compliance Program. The Notice promises that Treasury and the IRS will issue a limited correction program that will apply to certain unintentional operational failures to comply with section 409A. While this may be a welcome development, it appears that the program the Government envisions will be limited in scope and impact ?? for example, the Notice suggests that the program will provide methods by which certain operational failures may be corrected in the same taxable year that the failure occurred, and other methods by which certain unintended operational failures may result “in only limited amounts” becoming includible in income and subject to additional taxes.

For further information, please contact any of the following lawyers:

Marianna Dyson,, 202-626-5867

Fred Oliphant,, 202-626-5834

Anthony Provenzano,, 202-626-1463

Gary Quintiere,, 202-626-1491

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