Final Deadline for Code Section 409A Amendments

Any nonqualified deferred compensation arrangement that is subject to Section 409A of the Internal Revenue Code must be brought into compliance with Code Section 409A by December 31, 2008. 

The failure to comply with the strict requirements of Code Section 409A will subject an employee (or consultant, director or other service provider) to adverse tax treatment, including accelerated taxation and a 20 percent penalty tax.  Although the Internal Revenue Service previously has extended the deadline for compliance, this time the IRS says that it really means it, and that December 31, 2008 will be the final deadline for amendments to comply with Code Section 409A.  As a result, we do not expect any further extensions for compliance with Code Section 409A and no relief for "late amenders."  Therefore, if you would like our assistance with your Code Section 409A amendments, please contact us today.

As we have written previously, deferred compensation for purposes of Code Section 409A is defined very broadly, and any nonqualified plan, arrangement or program that provides for compensation payable in a future year should be reviewed to determine if any amendments are necessary to comply with Code Section 409A. 

We recognize that identifying and updating every deferred compensation arrangement subject to Code Section 409A will be a time-consuming process.  In addition, the required amendments may require the consent of the impacted employees, the review and approval by the employer's board of directors (or compensation committee) and, for public companies, disclosure of the amendments in SEC filings.  Because the amendments need to be completed by December 31, 2008, employers should address these issues now.

We anticipate a very busy fourth quarter.  We already have contacted most of our clients that we advise regularly on compensation matters regarding their Code Section 409A deferred compensation plans and the amendments needed to those documents.  If you would like assistance with your Code Section 409A compliance initiatives, please let us know as soon as possible.

Sherman & Howard has prepared this advisory to provide general information on recent legal development that may be of interest. This advisory does not provide legal advice for any specific situation. This does not create an attorney-client relationship between any reader and the Firm. If you want legal advice on a specific situation, you must speak with one of our lawyers and reach an express agreement for legal representation.

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© 2008 Sherman & Howard L.L.C.                                           September 29, 2008