November 3, 2008Client Alert

Deadline for 409A Compliance Approaching

December 31, 2008 is the deadline for deferred compensation arrangements to be modified in order to comply with new rules under section 409A of the federal tax code. These rules contain the most sweeping tax law changes affecting employee and independent contractor compensation in recent years. In essence, a deferred compensation arrangement that does not meet very specific requirements will cause a person receiving the deferred compensation (i.e., an employee or independent contractor) to be subject to (1) a 20% penalty, (2) accelerated taxation and (3) interest.

Deferred compensation arrangements covered by these regulations include (but are not limited to) the following:

  • Certain stock option, restricted stock, phantom stock, stock appreciation rights and other equity-based incentive arrangements
  • Supplemental executive retirement plans
  • “Wrap” plans (for deferrals in excess of statutory limits such as limit on deferrals under a 401(k) plan)
  • 457(f) deferred compensation plans (for tax-exempt entities)
  • Taxable welfare benefit plans (e.g., self-funded retiree health plan for key executives)
  • Perks payable in future years (e.g., country club membership)
  • Certain severance plans
  • Certain multi-year bonus plans
  • Certain other employment or service agreements that contain any provision deferring compensation

The IRS has given companies until the end of 2008 to modify existing deferred compensation arrangements to comply with the new rules. Failure to modify a noncompliant deferred compensation arrangement by the end of 2008 can have severe tax consequences to the employee or independent contractor receiving the compensation.

If you have any questions concerning this issue, or if you would like to set a time to have your deferred compensation arrangements reviewed, please contact your Michael Best & Friedrich LLP attorney or one of the following attorneys:

John L. Barlament at 414.225.2793, or

Matthew L. Storms at 608.283.0103, or 
Hamang B. Patel at 608.283-2278, or

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