In response to comments from benefits practitioners, the IRS has issued a general extension to December 31, 2008 to bring most deferred compensation arrangements into compliance with, or meet one of the exemptions from, the new Section 409A of the Internal Revenue Code (“409A”). This broad extension replaces the limited transition relief previously announced in September of this year. To avoid significant penalties (including immediate taxation, penalties and interest), employment, severance, bonus, commission, change-in-control, split-dollar, excess benefit, stock option, phantom stock and other deferred compensation arrangements for employees and other service providers (such as independent contractors or directors) must be brought into compliance by December 31, 2008.

Deadline Extended to 2008

On October 22, 2007, the Treasury Department and IRS issued Notice 2007-86, superseding the previously issued limited transition relief provisions of Notice 2007-78. The new notice generally extends prior transition rules for 409A that were set to expire on December 31, 2007 to December 31, 2008. In general, this means that a deferred compensation arrangement will not violate the requirements of 409A on or before December 31, 2008, so long as the plan is operated at all times after January 1, 2005 in good-faith compliance with 409A and the plan document is amended on or before December 31, 2008 to comply with 409A.

Suggested Actions for 2007 and 2008

While the compliance deadline has been extended to December 31, 2008, we recommend that employers continue the process of reviewing and updating their deferred compensation arrangements now so that all arrangements are appropriately documented and operating in compliance with the new regulations by the December 31, 2008 deadline.

In addition to amending written provisions of a plan for 409A compliance by the December 31, 2008 deadline, the following important decisions regarding the payment structures of these arrangements should be made and documented by December 31, 2008:

• A new election must be made if a compliant time or form of payment is not currently elected by a service provider under an existing arrangement.
• You must designate in writing a compliant time and form of payment if an existing arrangement (whether written or oral) does not currently provide for these items or if a new choice needs to be added.
• To fit an existing arrangement within the short-term deferral exception (the exception that allows a payment made within two and one-half months following the close of the taxable year in which the payment is no longer subject to a substantial risk of forfeiture to be excluded from the definition of “deferred compensation”), the arrangement must be amended.
• If you want installment payments provided under an existing arrangement to be treated as a right to a series of separate payments (rather than a single payment), you must designate this treatment in writing.
• For an existing arrangement that provides payments upon separation from service for “good reason,” you must conform your definition to the safe harbor definition to take advantage of the involuntary separation from service exception from 409A.
• If you have existing arrangements linked to qualified plans (generally, SERPs and excess benefit plans), these must be de-linked and new elections made by participants.
• If your arrangement provides for discounted stock options, you must either bring the arrangement into compliance with 409A or exclude it from 409A by raising the exercise price up to fair market value as of the date of grant.
• After December 31, 2008, no funding of arrangements by offshore trusts, or while the company’s defined benefit plan remains at certain levels of underfunding, is permitted.

Please note that if you wish to accelerate the payment of deferred compensation benefits into 2008, you must still elect to do so prior to December 31, 2007.