Feds Delay 409A Regs Enforcement for a Year

October 4, 2006 (PLANSPONSOR.com) - Companies with nonqualified deferred compensation plans (NQDC) will now have an extra year to make sure they're complying with the proposed regulations under section 409A, according to a government notice.

The US Treasury Department and Internal Revenue Service (IRS) announced Wednesday that full compliance with the operational and documentary requirements of the Section 409A is 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.

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).

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

Wednesday’s notice said that the later deadlines specifically do not apply to any stock option or stock appreciation right that:

  • with respect to the grant of such stock right, such corporation either has reported or reasonably expects to report a financial expense due to the issuance of a stock right with an exercise price lower than the fair market value of the underlying stock at the date of grant that was not timely reported on financial statements or reports for the period in which the related expense should have been reported under generally accepted accounting principles.
  • was granted with respect to stock of a corporation that as of the date of grant had issued any class of common equity securities required to be registered under section 12 of the Securities Exchange Act of 1934;
  • was granted to a person who, as of the date of grant, was subject to the disclosure requirements of section 16(a) of the Securities Exchange Act of 1934 with respect to such issuer.

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