1. Identify arrangements that provide for a deferral of compensation.
- Identify the service-provider relationships covered by the rules (e.g., employees, independent contractors, board members).
- Identify arrangements with service providers that are
deferrals of compensation.
- An arrangement
provides for a deferral of compensation if a service
provider has a legally binding right during a tax year to
compensation that is or may be payable in a later tax
— Some specific arrangements are exempt from the rules.
— All other arrangements are subject to the rules.
- Grandfathered amounts are not subject to the rules (e.g., amounts earned and vested prior to January 1, 2005).
- An arrangement provides for a deferral of compensation if a service provider has a legally binding right during a tax year to compensation that is or may be payable in a later tax year.
Caution: Grandfathered status is lost if the arrangement is materially modified after October 3, 2004.
2. For each arrangement, decide between removing the deferral of compensation and complying with the rules.
- The deadline for this decision is December 31, 2007.
- After the deadline, an arrangement that defers compensation is always required to comply with the rules, even if the deferral feature is later eliminated.
- Weigh the benefits of providing deferred compensation against the costs of compliance and exposure to penalties.
3. Design each arrangement to comply with the rules.
- Compliance with the basic rules is required (e.g., restrictions on deferral elections, funding, and distributions).
- Decide whether to adopt various special exceptions to the rules that provide certain advantages but make plan administration more complex.
4. Develop and implement policies and administrative procedures.
- The complexity of the rules makes strong policies and procedures important.
- Designate an individual who has ultimate responsibility for developing policies and procedures and for ensuring that they are followed.
5. Obtain service-provider
written elections as to time and form of payment by December 31,
Caution: Some elections result in noncompliance:
- An election in 2007 to postpone a payment that would otherwise be received in 2007.
- An election in 2007 causing a payment to be made in 2007 that would otherwise not be made in 2007.
6. Evaluate compliance for the period between January 1, 2005, and January 1, 2008.
- Final regulations are effective for tax years beginning on or after January 1, 2008.
then, good-faith compliance is required.
- Compliance with the statute and Notice 2005-1 is required.
- Compliance is not required with either the proposed or final regulations.
- However, compliance with the proposed or final regulations is considered goodfaith compliance.
- Review plan operations to determine whether violations have occurred and take appropriate actions.
7. Prepare a written plan by December 31, 2008.
- The final regulations specify the required content of the written plan.
- The written plan must specify the plan’s terms as of January 1, 2008, but is not required to specify the terms for the period prior to January 1, 2008.
Note: These rules are current as of September 2007 but are subject to change based on further IRS guidance. Deferred compensation plans that are maintained under a collective bargaining agreement that was in effect on October 3, 2004, are not required to comply with Sec. 409A until the earlier of December 31, 2009, or the date the collective bargaining agreement terminates.