409A Deferred Compensation Compliance Rules Delayed Until 2009

In Notice 2007-86 (October 22, 2007), the IRS has extended the time for compliance with the deferred compensation rules under Internal Revenue Code Section 409A through December 31, 2008. This does not mean companies can ignore the law until then. Companies will be considered compliant only if they operate their deferred compensation plans in accordance with the law and with regulations published under it through 2008. So any deferred compensation issued after the Code section's 2005 effective date will have to meet the proposed or final rules that were in effect when the awards were issued, while any deferred awards issued before that date are given through the end of 2008 to be brought into compliance with the final regulations.

Discounted stock options and stock appreciation rights issued prior to 2005 can be exchanged for non-discounted awards through 2008, provided this does not result in the exchange of the award for cash or vested property payable in the year of the transaction. Backdated options, however, are not granted relief. More generally, the deadline for employees to make elections for future deferrals of awards that do not meet the deferred compensation exemptions provided by the law are extended through 2008, although the notice does limit acceleration of deferrals into 2007 and 2008.

The regulation supersedes a ruling two months ago providing only limited documentary compliance relief.

The IRS has also issued Notice 2007-89, which explains wage reporting and withholding under Section 409A.