Nonqualified deferred compensation and sec. 409A final regs.

• Author: Rose, Jonathan

Prior to Sec. 409A, the regulations applicable to deferred compensation plans, particularly nonqualified deferred compensation (NQDC) plans, were somewhat murky. After a number of corporate scandals, Congress legislated restrictions for NQDC plans in 2004.

Since the enactment of Sec. 409A, interpretive guidance and proposed regulations have been issued. On April 10, 2007, the IP, S released final regulations for Sec. 409A relating to NQDC plans (TD 9321). The new regulations are applicable for tax years beginning on or after January 1, 2008. If the plan was acting in "good faith" prior to the effective date of the new regulations, relief will generally be granted if the plan was not fully compliant with the guidelines issued. No extension beyond the effective date is expected. Thus, every NQDC plan should be evaluated for compliance with the new regulations and amended (if necessary) before the end of 2007.

An NQDC plan is an arrangement compensating an employee for services after the year in which they were actually performed. The purpose of many plans is to defer compensation to later years when the recipient is expected to be in a lower tax bracket or to merely defer payment of a tax (which has value in and of itself). Organizations are using NQDC plans to provide top executives with substantial retirement benefits that cannot be achieved with qualified plans, such as a Sec. 401(k) plan. Currently many of these plans are being marketed as supplemental executive retirement plans (SERPs). NQDC plans can be very flexible and set up to the employer's custom needs to benefit a select few top executives, which is not normally allowed under a qualified plan. The most common options made available to attract and maintain key executives using NQDC plans are life insurance plans, excess-benefit plans, top-hat plans, severance plans, deferred bonuses, vested masts, rabbi trusts, secular trusts, stock options, phantom stock, stock appreciation rights, and golden, silver, tin, and pension parachutes. Many of these arrangements are considered abusive, particularly in light of the events surrounding Enron and other corporate scandals, allowing select members of management to gain access and control of the monies while still deferring the compensation.

Before the final Sec. 409A regulations were issued, there was little statutory guidance on NQDC plans. In order to clear up confusion, the American Jobs Creation Act, P. L. 108-357, was signed into law in...