U.S. Treasury and IRS Issue Proposed Regulations Under Section 409A
09/30/2005One-Year Extension Provided For Plan Documents, But Action May Still Be Desirable Before Year End
On September 29, 2005, the U.S. Treasury Department and the Internal Revenue Service (IRS) issued long-awaited proposed regulations regarding the treatment of nonqualified deferred compensation under Internal Revenue Code Section 409A. (For a detailed discussion of the American Jobs Creation Act of 2004 and its impact on nonqualified deferred compensation plans, please see http://www.mwe.com/info/news/wp1004a.pdf.) The new regulations can be viewed at the following link: http://www.treas.gov/press/releases/reports/reg15808004.pdf.
The proposed regulations expand in detail upon the guidance provided in Notice 2005-1 and, in many cases, interpret Code section 409A more favorably for taxpayers. Most notably, the proposed regulations generally provide a one-year extension of time for employers to amend their nonqualified deferred compensation plans to comply with Section 409A. In addition, until December 31, 2006, employees, directors and other service providers will be allowed to (1) amend their payment elections for nonqualified deferred compensation (not otherwise payable in 2006 or any earlier period) subject to Section 409A and (2) commence nonqualified plan distributions at the same time as the participant begins receiving distributions from the related tax-qualified plan.
Until the Treasury and the IRS issue final regulations, employers are required to comply in operation with Section 409A in “good faith” notwithstanding the delayed effective date for plan amendments. Taxpayers may rely on the proposed regulations as good faith compliance with Section 409A until the issuance of final regulations.
The proposed regulations do not provide for any extension of time for a participant to terminate participation or cancel elections under Q&A 20 of Notice 2005-1 or for an employer to amend applicable nonqualified deferred compensation plans for any termination or cancellation election. As a result, in some instances, actions to terminate a deferral for 2005 may need to be taken before December 31, 2005 to comply with Section 409A.
This publication highlights some of the key items addressed in the proposed regulations. If you are interested in receiving additional communications, including event notifications, from McDermott on this topic, please e-mail Megan Wilkinson at mwilkinson@mwe.com. In the meantime, here are our initial thoughts on some of the highlights of the proposed regulations.
