Advisories

Proposed IRS Regulations Provide Detailed Rules for Deferred Compensation Plans

November 2005

Section 409A was added to the Internal Revenue Code in 2004, providing generally that unless certain requirements are met, amounts deferred under a nonqualified deferred compensation arrangement are currently taxable to the recipient (even though not paid currently), and the recipient is subject to a 20% penalty on such income plus interest at an increased rate. At the end of 2004, the Internal Revenue Service issued Notice 2005-1, providing interim guidance concerning the application of Section 409A. However, the Notice left many questions unanswered.

Regulations were recently proposed under Section 409A, providing detailed rules for deferred compensation plans, restricted stock, stock options and stock appreciation rights. For the most part, the proposed regulations are helpful, providing needed guidance in areas that were unclear and further extending the time period for bringing existing plans into compliance. The highlights of the proposed regulations are summarized below. As indicated, there are still some unanswered questions that remain to be addressed.