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IRS DELAYS DOCUMENT DATE FOR 409A DEFERRED COMP RULES

September 11, 2007

The IRS yesterday gave companies with non-qualified deferred compensation plans an extra year - until December 31, 2008 - to rewrite their plans to comply with the severe new rules enacted in the wake of the Enron and WorldCom scandals (Notice 2007-78).

While this extension will save the lives of any number of deferred compensation attorneys, its benefits to employers is very limited. While the documents can wait, taxpayers still must decide whether to continue or terminate their plans by December 31 to avoid the possibility of either a 20% penalty tax on employee deferred amouunts or unintended long-term deferrals of earnings.

Section 409A treats deferred compensation as current income, and subjects it to an additional 20% tax, if it fails to meet the requirements of new Section 409A. These rules place stringent limits on the time and manner in which compensation can be deferred.

The notice allows plans to be amended in 2008 if the amendments are retroactive to the beginning of the year. It provides rules for operating plans in compliance with 409A until final regulations are issued, and before the plans are amended.

The notice also says that the IRS will establish a limited "Voluntary Compliance Program" to enable plans to correct minor and unintentional violations without clobbering employees with big tax bills.

This is all nice, but Section 409A is still a horrible piece of Congressional malpractice. Only full repeal will really provide the appropriate "transitional relief."

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