Additional Time to Amend NQDC Plans

October 17, 2006 — IRS Notice 2006-79 provides additional time to amend nonqualified deferred compensation (NQDC) plans

Section 409A of the Internal Revenue Code, adopted as part of the American Jobs Creation Act of 2004, established complex rules that nonqualified deferred compensation (NQDC) plans must follow in order to avoid significant tax penalties. Section 409A is generally effective for compensation deferred after 2004, although compensation deferred in prior years may also fall under the new law in some cases.

The IRS provided initial guidance on IRC Section 409A in Notice 2005-1. The Notice included a number of rules designed to ease the transition to the new law, and required that all NQDC plans be amended to comply with Section 409A no later than December 31, 2005. The IRS subsequently issued proposed regulations that extended the general deadline for amending NQDC plans to December 31, 2006, and extended most of the Notice 2005-1 transition rules through that date.

IRS Notice 2006-79 extends the general deadline for amending NQDC plans for IRC Section 409A from December 31, 2006 to December 31, 2007. The following transition rules have also been extended:

NQDC plans can let employees change the timing or the form of payment of previously deferred compensation at any time until December 31, 2007.

Note: An election made in 2006 can't apply to amounts that would otherwise be payable to the employee in 2006. And an election made in 2006 can't cause an amount to be paid in 2006 that otherwise would be paid in a later year. A similar rule applies to 2007 elections.

NQDC plans can continue, through 2007, to link the timing and form of benefits under the plan to a participant's elections under a qualified plan. The Notice also extends this relief to NQDC plans that are linked to 403(b) and 457(b) plans.

Employers can generally avoid Section 409A by replacing discounted stock options and stock appreciation rights (SARs) with non-discounted stock options and SARs by December 31, 2007. (This transition relief extension doesn't apply to certain companies who have backdated options, resulting in an exercise price that was less than the fair market value on the date of grant.)

Where a stock option or SAR allows an employee to defer the receipt of payment beyond the exercise date (and is therefore subject to Section 409A), the stock right can be amended at any time through 2007 to provide for fixed payment terms that satisfy Section 409A.

The Notice also provides that collectively bargained NQDC plans generally aren't required to comply with Section 409A until December 31, 2009 (or, if earlier, the date the last of the applicable collective bargaining agreements ends).

Finally, the Notice states that while the IRS intends to issue final Section 409A regulations before the end of 2006, those regulations won't be effective until January 1, 2008. Until then, NQDC plans must be operated in good faith compliance with the statute. Compliance with Notice 2005-1, the proposed regulations, or the final regulations will generally satisfy this good faith compliance requirement.

About Bay Colony Partners
Bay Colony Partners provides employers with employee benefit services and products, including 401(k) retirement plans, executive benefits, group health care plans, and human resources services. Principals Bob Auditore, Gary Cowles, and Jeff Kagy, are experts in their respective practice area and directly service clients with strategic direction, customized solutions and benefits plan design, as well as the implementation and administration of the plans and initiatives.

As a consulting firm with brokerage services, Bay Colony Partners is a source for the latest knowledge that employers need to plan and shape their benefits programs, and a resource for having insurance companies compete on price and service. They work with company leadership to ensure regulatory compliance, fiduciary responsibility, and comprehensive programs for senior executives and all staff alike. The company delivers a full range of human resources services, as well, ranging from organizational consulting to recruitment and staffing support.

Located in Woburn, MA, the company services employers throughout the New England region.
 
Contact: Gary Cowles, gcowles@baycolonypartners.com
Bay Colony Partners
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