<nobr>Apr 10, 2007</nobr>

Treasury, IRS Release Final Section 409A Regulations

The Department of Treasury and Internal Revenue Service (IRS) today released final regulations implement Section 409A of the Tax Code governing deferrals of income in non-qualified plans. The regulations are effective upon publication in the April 17 Federal Register and are attached to this email (PDF, 397pp). The final regulations address several recommended changes to the proposed regulations included in ERIC comments. Among other changes, specific changes to the recommendations that respond to ERIC comments include:

• The final regulations provide that the extension of an option exercise period generally is not treated as an additional deferral feature or a modification of the stock option for section 409A purposes if the exercise period is not extended beyond the earlier of the original maximum term of the option or 10 years from the original date of grant of the stock right.
  
• The final regulations clarify that a right to a benefit that is excludable from income will not be treated as a deferral of compensation for purposes of section 409A. Accordingly, for example, an arrangement to provide health coverage excludable from income under section 105 generally would not be subject to section 409A.
  
• The final regulations clarify that a legally binding right to receive a nontaxable benefit does not provide for a deferral of compensation for purposes of section 409A, unless the service provider has received the right in exchange for, or has the right to exchange the right for, an amount that will be includible in income (other than due to participation in a cafeteria plan described in section 125).
  
• The final regulations expand the exception for U.S. citizens or lawful permanent residents to cover nonelective deferrals of foreign earned income as defined in section 911(b)(1) without regard to section 911(b)(1)(B)(iv) and without regard to the requirement that the income be attributable to services performed during the period described in section 911(d)(1)(A) or (B).
  
• The preamable states that IRS and Treasury will provide further guidance in the form of a notice with regard to split-dollar life insurance policies. The notice (attached) provides that split-dollar life insurance arrangements that provide only death benefits to or for the benefit of the service provider are excluded from coverage under section 409A under the exception for death benefit plans.
  
• The final regulations provide that the forfeitable award rule is available even if the right to the compensation may vest earlier than 12 months following the election due to the service provider’s death or disability, or due to a change in control event (as defined for purposes of section 409A) with respect to the service recipient.
  
• With respect to plans linked to qualified plans, the final regulations provide that where the additional amounts deferred under the nonqualified deferred compensation plan reflect only matching contributions that would be available under the qualified plan absent the restrictions in the qualified plan intended to reflect limits on qualified plan contributions under sections 401(m) and 401(a)(17), the final regulations provide relief but solely with respect to the matching amount that could have been contributed to the qualified plan absent such limits.
  
• The final regulations provide that where the right to a payment is contingent upon a voluntary separation from service following an occurrence that constitutes good reason for the service provider to terminate his or her services, the right may be treated as payable only upon an involuntary separation from service where the good reason condition is such that the service provider’s separation from service effectively is an involuntary separation for purposes of section 409A.
  
  

Final Section 409A Regulations

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