Alerts

Code Section 409A Update

October 7, 2005

We previously alerted you to new Section 409A of the Internal Revenue Code ("Section 409A").  Section 409A codifies new rules governing nonqualified deferred compensation plans, including equity incentive plans, severance plans and other plans and arrangements.  On September 29, 2005, the Internal Revenue Service (IRS) released its proposed regulations with respect to Section 409A.  The proposed regulations expand on the guidance provided in the initial round of guidance issued last December in IRS Notice 2005-1.  Key topics addressed in the proposed regulations include the treatment of stock appreciation rights and stock options, severance pay, and short-term deferrals; "evergreen" elections; elections with respect to performance-based pay; cancellation of deferral elections after a financial emergency; 401(k) "wrap plans"; multiple payment events; the timing of payments and rules of administrative convenience; and distributions upon the change in control of a partnership.  The proposed regulations also include additional transition relief and extend some of the transition relief provided in Notice 2005-1.