Additional Transitional Relief Issued under Section 409A of the Code
October 4, 2006
Earlier today, the Treasury Department and IRS issued Notice 2006-79 (the "Notice"), which provides an extension of existing transition relief for nonqualified deferred compensation arrangements that will be subject to the requirements of the regulations under section 409A of the Internal Revenue Code of 1986, as amended ("409A"). A copy of the Notice is attached. The Treasury Department and IRS indicated that they expect to publish final regulations under section 409A later this year. The final regulations under Section 409A will not become effective until January 1, 2008.
The Notice generally extends through 2007 much of the transition relief initially provided for in Notice 2005-1 and the proposed regulations issued under 409A on October 4, 2005 (the "Proposed Regulations"). In particular, the Notice:
- delays the deadline for full compliance with the operational and documentary requirements of 409A until January 1, 2008 (although taxpayers must continue to operate their plans in good faith compliance with 409A in the interim);
- permits service providers and service recipients to make changes to payment elections through December 31, 2007, except that no change after January 1, 2007 may accelerate a payment into 2007 or defer an amount that would otherwise be paid in 2007 to a later year;
- extends the ability to link a payment election under a nonqualified deferred compensation plan to an election under a qualified plan through December 31, 2007;
- permits the amendment of outstanding stock rights subject to 409A to provide for fixed payment terms through December 31, 2007;
- permits the substitution in 2007 of non-discounted stock options and stock appreciation rights for discounted stock options and stock appreciation rights through December 31, 2007, but only to the extent that any cancellation and reissuance does not result in the cancellation of a deferral in exchange for cash or vested property in 2007; and
- provides that a nonqualified deferred compensation arrangement maintained pursuant to a collectively bargained agreement in effect on October 3, 2004 is not required to comply with 409A until the earlier of the date the collectively bargained agreement terminates or December 31, 2009.
Note that the transition relief specified in the Proposed Regulations and the Notice is not extended for discounted options issued to a reporting company's insiders with respect to which such company has reported or reasonably expects to report a financial expense that was not timely reported under generally accepted accounting principles. As a result, to avoid 409A, discounted options issued to insiders of a reporting company at the time of grant must be remedied in 2006.
Please call any of your regular contacts at the firm or any of our partners and counsel listed under Employee Benefits in the Our Practice section of our web site if you have any questions about these matters.