November 15, 2007Client Alert

IRS Extends Deadline for Compliance with Code Section 409A


On October 22, 2007, the Internal Revenue Service (“IRS”) issued Notice 2007-86 (the “Notice”) which generally extends to December 31, 2008, the deadline for compliance with the final regulations (the “Final Regulations”) issued in April 2007 under Section 409A of the Internal Revenue Code of 1986, as amended (the “Code”). The previous deadline for compliance was December 31, 2007. Section 409A, which was effective on and after January 1, 2005, imposes significant new requirements on nonqualified deferred compensation (“NDC”) plans and arrangements. If an NDC plan or arrangement fails to meet these requirements, participants in the plan or arrangement are required to immediately include amounts deferred under the plan or arrangement in income and pay additional taxes on such income. Given the complexities of Section 409A, the Notice provides welcome relief with respect to the compliance deadline. Outlined below are key provisions of the Notice.


Good Faith Compliance

NDC plans or arrangements subject to Section 409A must be operated in good faith compliance with Section 409A and applicable guidance through December 31, 2008. For the remainder of 2007, an NDC plan or arrangement that complies with either the proposed regulations or the Final Regulations will be deemed in good faith compliance. After January 1, 2008, compliance with Notice 2005-1 or the Final Regulations will be deemed reasonable, good faith compliance. Subject to limited exceptions, the proposed regulations generally may not be relied on after 2007.

Document Compliance

The Notice provides that amendments to NDC plans or arrangements to comply with Section 409A and the Final Regulations may be adopted anytime prior to December 31, 2008.

Changes to Time and Form of Payments

NDC plans or arrangements may allow changes to the time and form of NDC payments until December 31, 2008. Such changes, however, may not be made with respect to payments otherwise payable in the year of the election change and may not cause an amount to be paid in the year of the election change that would not otherwise be payable during that year. For example, a participant may not elect during 2008 to defer to a later taxable year an amount already scheduled to be paid in 2008, nor may a participant make an election change in 2008 that results in a payment being accelerated and paid in 2008. Beginning January 1, 2009, changes to the time and form of NDC payments will be subject to Section 409A’s subsequent deferral election and anti-acceleration rules.

“De-Linking” of Plans Linked with Qualified Plans

The Notice extends the deadline under the Final Regulations for “de-linking” distributions under NDC plans from distributions under qualified plans. Therefore, NDC plans or arrangements that, for example, incorporate by reference the distribution provisions in a linked qualified pension plan or 401(k) plan, will not need to be “de-linked” until December 31, 2008. The Notice additionally extends this deadline to NDC distributions linked to distributions under Section 403(b) annuities, Section 457(b) plans, and certain broad-based foreign plans.

Stock Options and SARs

The Notice extends until December 31, 2008 the ability of certain non-public companies to amend a discounted stock option or stock appreciation right (a “SAR”) granted after December 31, 2004, so that either (1) it has an exercise price equal to the fair market value of the underlying stock on the original grant date or (2) it retains its discounted exercise price but is exercisable only upon certain limited events and otherwise complies with Section 409A. Such an amendment to these post-2004 discounted stock options and SARs is necessary to comply with Section 409A’s requirements. Any such amendment in 2007, however, must not result in the payment of cash or vested property in 2007. Similarly, any such amendment in 2008 must not result in the payment of cash or vested property in 2008. Any discounted stock option or SAR that is amended to comply with Section 409A will be treated as if granted on its original grant date.


For more information, contact your Michael Best & Friedrich LLP attorney or one of the following attorneys:


John C. Lapinski at 414.225.4941, or
Charles P. Stevens at 414.225.8268, or


Hamang B. Patel at 608.283.227, or

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