New NQDC Guidance Expected by Late Summer

June 24, 2005 ( - A second set of regulatory guidance about nonqualified deferred compensation programs under Internal Revenue Service (IRS) Code 409A could be out by August, according to a US Treasury Department official.

>Daniel Hogans, an attorney-advisor in the Office of Tax Policy said at a June 23 conference sponsored by the American Law Institute-American Bar Association that the new guidance is expected to cover drafting and operational concerns, according to a BNA report.

>Hogans cautioned that the regulations are being reviewed at the highest levels of the department and the IRS and this review process may push back the release of the regulations until September. The guidance may be released as proposed and/or temporary regulations.

>Attorney William Sweetnam Jr., formerly with the Treasury Department and now with Groom Law Group in Washington, explained that Section 409A provides qualified plan rules for nonqualified deferred compensation arrangements by defining election and distribution events and providing restrictions on funding that must be met in form and operation of the plan or arrangement.

>Among the many issues being considered for guidance is the possibility of a permanent solution to the temporary carve out for Employee Retirement Income Security Act (ERISA) severance plans contained in  Notice 2005-1 , Hogans said.

>These plans usually cover rank-and-file employees, he said, but for highly paid executives and in light of the six-month delay rule for executives of publicly traded companies, the question is whether and to what extent severance may provide for a deferral of compensation.

>Hogans drew a distinction between immediate payment of compensation after an involuntary separation from service and amounts payable over a number of years in a voluntary or involuntary separation from service, by saying, “that looks a lot more like a deferral of compensation.” If you can voluntarily quit, he said, “I don’t think there’s any question that that should be considered severance at all.”

>The attorney reported that the question about whether there would be an extension of time beyond the December 31, 2005, deadline in Notice 2005-1 is most likely being weighed by top policymakers at the IRS and the Treasury Department.

>The two men also   reviewed concerns relating to penalties, including the possibility of penalties under both tax code Sections 280G and 409A in change of control situations. They said these are difficult issues and will be likely addressed in the third round of guidance, rather than the second round.