The Service issued final regulations on nonqualified deferred-compensation arrangements under Sec. 409A (TD 9321, 4/10/07). These rules generally follow the proposed regulations (REG-158080-04, 10/4/05), but provide additional guidance and clarify many key issues, including:
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Liberalizing the definition of the underlying stock for stock options and stock appreciation rights (SARs) that may be permitted without triggering the application of Sec. 409A;
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Easing the ability to extend the exercise period for stock options and SARs without triggering Sec. 409A;
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Clarifying that payments can be limited based on an objective, defined formula or a fixed limit established on or before the date, time and form of payment is required under Sec. 409A;
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Adding guidance on payments under the short-term deferral exception to Sec. 409A;
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Clarifying that deferred-compensation payments can be delayed if payment would jeopardize the employer’s ability to continue as a going concern;
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Providing more exceptions for severance-pay arrangements;
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Clarifying the definition of a deferred-compensation payment; and
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Providing more flexible rules on the treatment of similar deferred-compensation arrangements as one plan for purposes of the Sec. 409A penalties.
The final regulations were effective April 17, 2007, but generally apply starting in 2008 and may be applied retroactively. All deferred-compensation arrangements must be in writing and in compliance with Sec. 409A by Dec. 31, 2007. Plans are not required to be amended retroactively to cover the period from the Jan. 1, 2005 effective date of Sec. 409A through the end of the transition period, but must show operational compliance with the rules during that time.
Additional separate guidance is expected to address the prohibition on offshore funding and springing trusts, application of the rules to partnership arrangements, and income calculation and inclusions, none of which is covered in the final regulations. (For a discussion of the proposed regulations, see Singer, “Deferred Compensation for Executives under Sec. 409A,” Part I, TTA, July 2006, p. 402, and Part II, TTA, August 2006, p. 476.)
