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IRS Issues Final Section 409A Regulations for Nonqualified Deferred Compensation

    Client Alerts
  • April 13, 2007

On April 10, the IRS and the Treasury Department issued the long-awaited final regulations regarding nonqualified deferred compensation arrangements under Section 409A of the Internal Revenue Code.  Section 409A was enacted as part of the American Jobs Creation Act in October 2004 and applies to a wide array of benefit and compensation arrangements.  Failure to comply with Section 409A also carries significant penalties for participants.  The nearly 400 pages of regulations retain many of the rules first announced in proposed regulations issued in late 2005, but also include various changes and clarifications to address the numerous public comments received in response to the proposed regulations.  Among other things, the final regulations cover the types of compensation arrangements subject to Section 409A, clarify the rules for deferral elections and payments of deferred compensation and expand on the short-term deferral exception to Section 409A.  The final regulations also describe the requirements for written plan documents and the provisions that must be included. 

In connection with the final regulations under Section 409A, the IRS and the Treasury Department also published a special notice regarding the application of Section 409A to split-dollar life insurance arrangements. 

All plans subject to Section 409A will need to be re-written to comply with Section 409A and the final regulations by December 31, 2007.  In the meantime, employers are still required to operate under the good faith compliance standard that has been in effect.  The final regulations do not address tax reporting and penalties under Section 409A.  Future guidance regarding these issues is expected. 

The Section 409A final regulations will be the subject of a more detailed article in the near future.