December 31, 2008 is the deadline for full compliance with the sweeping restrictions on non-qualified deferred compensation arrangements issued under Section 409A of the Internal Revenue Code. Operational compliance with these rules has been required since 2005. However, employers have only until the end of the year to bring all non-qualified deferred compensation arrangements into documentary compliance with 409A.
The penalties for noncompliance with 409A are steep – immediate inclusion in income for all vested benefits and a 20% excise tax on all such amounts. For this reason, it is important to identify all arrangements that may be treated as deferred compensation under 409A and to amend them to comply with 409A requirements immediately.
Section 409A defines deferred compensation broadly. Compensation that is earned, or to which there is a legally binding right, in one taxable year, but that is payable and includable in income, pursuant to the terms or a plan or arrangement, in a subsequent tax year is considered deferred compensation subject to section 409A. Thus, 409A imposes requirements on a variety of plans and arrangements including:
• SERPs, excess benefit plans, and other non-qualified retirement plans;
• Separation and severance benefit plans;
• Bonus plans and programs;
• Salary continuation arrangements;
• Employment and retention agreements;
• Performance/incentive pay arrangements;
• Stock option plans;
• Guaranteed payments under partnership and LLC agreements;
• Leave programs;
• Sick pay plans; and
• Split dollar life insurance arrangements (providing benefits other than death benefits).
If you need assistance identifying or reviewing your non-qualified deferred compensation plans for 409A compliance before the December 31, 2008 deadline, please contact Michael Curto at 202-457-5611.