Experts: 409A Regs Delay Could Prove a 'Lifesaver' for Some

October 17, 2006 ( - Even though 409A non-qualified deferred compensation plan sponsors have been expected to have their Ps and Qs in order since 2005, the latest year-long regulatory implementation delay could prove to be a lifesaver.

That was a key conclusion from a canvas of plan providers and executive compensation consultants by PLANSPONSOR. com to gauge reaction to the implementation delay announced earlier this month. (See Feds Delay 409A Regs Enforcement for a Year ).

Most of the compensation practitioners said the extra year is likely to mean the difference between compliance and non-compliance for some plans – particularly in having the proper plan documents in place and in the timing of executives’ elections about how they want access to their funds.

“It gives us some time for the (Internal Revenue) Service to add clarity to the areas that are a little foggy for us, before we have to draft documents,” said Deborah Novotny, vice president retirement plan services at T. Rowe Price.   “There could be time for appropriate communications to and elections by executives.”

The US Treasury Department and Internal Revenue Service (IRS) announced that full compliance with the operational and documentary requirements of the Section 409A is being delayed until January 1, 2008, “at which time an adequate opportunity will have been provided for taxpayers to digest and comply with the final regulations,” the officials asserted.

The extension of transition relief generally applies to all affected 409A arrangements except certain discounted stock options subject to backdating concerns, as specified in  the document released earlier this year . Authorities have been investigating a number of companies for improperly backdating their stock option grants.

“The IRS is reaching out to the practitioners to find out what is doable and what is not doable,” said Segal’s John Graham, regional director of compliance research. “They are trying to be very helpful.”

Under the proposed regulations released in late 2005 , plans had until January 2007 to follow certain provisions of 409A (See Feds Put Out 2nd Deferred Comp Guidance Document).


Final regulations under section 409A are expected to be published later this year, the officials said, although good-faith operational compliance with the statutory requirements of Section 409A continues to be required.

"The fact that the Treasury has again extended the deadline for compliance to December 31, 2007, illustrates the complex nature of non-qualified deferred compensation plans," said Blaine Laverick, second vice president of the Principal Financial Group. "The extension of transition relief allows time for employers to carefully consider the non-qualified deferred compensation plans they have in place, or are planning to put in place over the next year, and become compliant. It also provides plan sponsors time to evaluate and take action once the anticipated final 409A regulations are released by the Treasury. "

"Companies have been delaying and they were coming up against the deadline," said Jim Clary, president of MullinTBG, an executive benefits firm. Declared Clary, flatly: "A lot of companies wouldn't have made the deadline if they hadn't delayed it."

Draft versus Final Regs

T. Rowe Price's Novotny said any movement toward more finalized regulations helps practitioners get a better handle on what regulators want them to do. "It was very, very important that this came out," she said, referring to the notice announcing the implementation delay. "If this was going to be transitional relief, the sooner we found out about that the better. It's a matter of draft versus final regs - not really knowing that you had an understanding of the Treasury's intent."

Regardless of the timing of any future regulatory guidance on 409A issues, Los Angeles lawyer Bruce Ashton is telling clients not to wait before drafting the necessary plan documents. "To the extent that guidance is already there, its better to have documents in place you can operate from," Ashton said. "If you need to tweak it later, you can."

One area where Ashton said questions remain: employer stock-based compensation.

However, Ashton generally differed with other 409A practitioners about the importance of the latest implementation delay. He pointed out that plans have needed since early 2005 to operate in good-faith compliance so that any new changes coming out of Washington should not be that earth shattering when it comes to most aspects of deferred comp programs.

"I see it as kind of a nice thing, but not essential," Ashton told