As we have previously reported, in order to avoid significant penalties (including immediate taxation, penalties and interest), most “deferred compensation arrangements” (e.g., employment, severance, bonus, commission, change-in-control, split-dollar, excess benefit, stock option, phantom stock, etc.) for employees and other service providers (such as independent contractors or directors) must either be brought into compliance with, or meet one of the exemptions from, the new Section 409A of the Internal Revenue Code (“409A”).

Deadline Extended to 2008

On October 22, 2007, the Treasury Department and IRS issued Notice 2007-86, superseding the previous, limited transition relief provided in Notice 2007-78 that we reported in a client alert last month. The deadline to bring most deferred compensation arrangements into compliance with 409A has now been extended 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.

Action Still Recommended in 2007

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.