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Important change in IRS Section 409A compliance deadline for nonqualified deferred compensation plans
On Oct. 22, 2007, the U.S. Treasury Department and the IRS issued Notice 2007-86, which generally gives
employers until Dec. 31, 2008, to bring their nonqualified deferred compensation (NQDC) plans into
compliance with the final NQDC regulations under Section 409A of the Internal Revenue Code. Previously,
the deadline was Dec. 31, 2007.
This notice supersedes Notice 2007-78, issued Sept. 10, 2007, which extended only the deadline
for bringing plan documents into compliance, but kept the effective date of the final regulations
at Jan. 1, 2008. The purpose of broadening the extension is to provide employers adequate time to
analyze their NQDC plans and make informed, reasoned decisions regarding the changes needed to bring
their plans into compliance with the final regulations.
Sec. 409A applies to a broad variety of deferred compensation arrangements and sets forth requirements
that affected plans must satisfy. Any employer with an NQDC plan — a deferred compensation plan that is
generally designed to favor certain individuals or groups of individuals — should make sure that the plan
is in compliance with the law. The penalties for noncompliance can be severe: Plan participants will be
taxed on plan benefits at the time of vesting, and a 20% penalty tax and potential interest charges also
will apply.
Employers should identify all plans or arrangements that may be subject to Sec. 409A and have them
reviewed to determine whether they’re operationally and administratively Sec. 409A compliant. If a
plan isn’t compliant, the employer must bring the plan and plan documents into conformity with Sec.
409A by Dec. 31, 2008.
Employers must also have operated their plans in “good faith” compliance with Sec. 409A retroactive
to 2005, when the requirements first went into effect.
The Treasury Department and the IRS expect to issue further guidance regarding a limited voluntary
compliance program that will help companies correct specific unintentional operational violations
of Sec. 409A. But no date has been set for issuing that guidance.
If you would like more information on how this IRS notice affects your nonqualified deferred
compensation plan, please contact us at coheninfo@cohencpa.com.
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