Deferred Compensation Plans, Severance Agreements and Other Deferral Arrangements Require Immediate Attention, Despite IRS Relief

The American Jobs Creation Act introduced new restrictions on a broad array of deferred compensation arrangements by adding Section 409A to the Internal Revenue Code. All types of nonqualified deferred compensation plans and most other income deferral arrangements, including employment and severance contracts, are affected. Last week, the Internal Revenue Service issued Notice 2007-78 which extends the deadline for full amendment of all deferred compensation arrangements until December 31, 2008, with two important caveats:

• First, all deferred compensation arrangements must specify in writing the time and form of payment in a manner that complies with Section 409A by December 31, 2007; and
• Second, all deferred compensation arrangements must comply, in operation, with the final regulations under Section 409A after December 31, 2007. (Compliance under the more lenient "good faith" standard has been required since January 1, 2005.)

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