Treasury and IRS Release Proposed Deferred Compensation Regulations

Today, the Treasury Department and IRS released an advance copy of their long-awaited proposed regulations providing guidance on the application of Code Section 409A to deferred compensation arrangements. The regulations are scheduled to be published in the October 4th Federal Register. The proposed regulations are intended to provide detailed answers on issues such as which programs are subject to Section 409A, how Section 409A applies to such things as severance arrangements and programs that coordinate with qualified plans, how one qualifies for the grandfathering of plans that existed before the law was changed, the rules for making deferral elections, and the permissible timing for payment of benefits under such programs.

Effective Date

The regulations are proposed to be effective commencing January 1, 2007. However, they can be relied on immediately for purposes of determining compliance during 2005 and 2006.

Transition Relief Extended for Some Purposes

Last December, the IRS provided transition relief that permitted certain actions to be taken during 2005 without violating Section 409A and stated that plans did not need to be amended to comply with the new rules until December 31, 2005. The proposed regulations extend some, but not all of the transition relief, through 2006. As a result, plan amendments are not required to be adopted until December 31, 2006, participants generally can be given until the end of 2006 to revise existing payment elections without violating the 409A rules, and programs that coordinate with qualified plans can generally continue that arrangement throughout 2006. However, the deadline for terminating deferred compensation programs or canceling deferral elections to avoid the 409A restrictions remains at December 31, 2005. Also, initial deferral elections for compensation to be earned for services performed during 2006 must comply with the new rules, which in many cases will require elections to be made by December 31, 2005.