Legal Bulletins

In Notice 2007-78, the IRS gives deferred compensation plan sponsors until December 31, 2008 to have plan documents fully amended to comply with Section 409A of the Internal Revenue Code. Despite this extension, however:

• Plan provisions relating to payment of benefits must be in writing by December 31, 2007;
• Plans subject to Section 409A must begin operating in accordance with final IRS regulations starting January 1, 2008; and
• Plan sponsors must finalize certain plan design decisions by January 1, 2008.

Background

Section 409A imposes new rules on a wide range of arrangements considered “deferred compensation” by the IRS. For example, Section 409A requires that benefits be payable only upon certain events and that the form of payment satisfy certain requirements. Besides traditional deferred compensation plans, other arrangements that may be subject to Section 409A include SERP’s, employment agreements, change-in-control agreements and certain equity-based plans.
Deadline for Complete Plan Amendments
Final IRS regulations issued last April gave Section 409A plan sponsors until December 31, 2007 to adopt written plan documents (if none exists) or to amend existing documents to include certain required provisions.
Notice 2007-78 extends the deadline for adopting complete plan documents or amendments to December 31, 2008. Any plan documents or amendments adopted after January 1, 2008 must be retroactive to January 1, 2008.
Deadline for Documenting Payment Provisions

Notice 2007-78, however, does not extend the December 31, 2007 deadline for ensuring that the plan uses a time and form of payment that complies with Section 409A and for documenting payment provisions in writing.
Sponsors that are unable to adopt complete plan documents or amendments by year end must at least ensure that the existing documents contain payment provisions that comply with Section 409A. If they do not, then those provisions must be clearly stated in writing by December 31, 2007.
Effective Date for Compliance with Final Regulations

Section 409A was generally effective January 1, 2005. However, plan sponsors have been allowed to operate their arrangements in “good faith compliance” – rather than under more stringent rules contained in the Section 409A regulations – through December 31, 2007. Notice 2007-78 does not extend the “good faith compliance” period. Therefore, starting January 1, 2008, Section 409A arrangements must operate in accordance with the final regulations.
Plan Design Decisions
The Section 409A regulations contain several alternative rules for complying with the payment restrictions (e.g., determining whether an employee who continues to work in a reduced capacity after retirement has had a “separation of service”).
The written documentation of payment provisions due by December 31, 2007 is not required to indicate whether any of these alternative rules will be followed. However, plan sponsors must make final decisions about following these alternatives so that the plan will be operated consistently starting January 1, 2008.
To-Do List
Although Notice 2007-28 gives sponsors an additional year to adopt complete plan documents or amendments, the following steps must be taken by December 31, 2007:

• inventory employee plans and arrangements to determine whether they are subject to Section 409A;
• review existing documents to make sure that the timing of distribution and the form of payment comply with Section 409A and are documented;
• if necessary, revise the payment provisions and document those provisions;
  review alternatives for complying with the Section 409A payment restrictions so those alternatives can be followed consistently starting January 1, 2008;
• as much as possible, have completed or nearly-completed plan documents or amendments in place to make it easier for plans to operate under the final Section 409A regulations starting January 1, 2008.