Exempt Organizations Advisory - Proposed Regulations Governing Nonqualified Deferred Compensation Under Section 409A Issued

Today, the IRS issued over 200 pages of proposed regulations governing distributions and deferral elections under nonqualified deferred compensation plans, thus implementing the change in the law that occurred in 2004 (new Code section 409A). All employers, including tax-exempt entities, need to review these regulations. They affect a wide variety of compensation arrangements, including employment agreements, severance plans, deferred compensation arrangements, and SERPs. Although the Treasury Department has emphasized that most plan amendments are not necessary until 2006, employers should review these regulations now because in some cases action will have to be taken in 2005.

Tax-exempt employers will be particularly interested in the discussion in the Preamble, stating that the rules under Section 409A apply separately and in addition to the rules governing deferred compensation of tax-exempt entities under Section 457(f). Note also that the Preamble states that tax-exempt entities may not rely on the definition of a deferral of compensation under Section 409A in applying Section 457(f). In addition, tax-exempt employers should pay particular attention to the rules governing severance plans, split-dollar arrangements, and short-term deferral arrangements. Additional guidance is provided on vacation leave, sick leave, compensatory time, disability pay, and death benefit plans.

The regulations can be accessed here.

For more information on this topic, please contact Catherine W. Wilkinson or Suzanne Ross McDowell.

The Exempt Organization Advisory is a general summary of the law and is not intended as specific legal advice for any organization.

Internal Revenue Service - Circular 230 Disclosure: As provided for in Treasury regulations, advice (if any) relating to federal taxes that is contained in this communication (including attachments) is not intended or written to be used, and cannot be used, for the purpose of (1) avoiding penalties under the Internal Revenue Code or (2) promoting, marketing or recommending to another party any plan or arrangement addressed herein.

For more information on this topic, please contact the authors or the attorneys with whom you usually work at Steptoe.

Questions and comments about the Exempt Organizations Advisory are always welcome and should be sent to bstone@steptoe.com.