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Deferred Compensation Agreements Should Be Reviewed, Again

By Matthew P. Jacobs

In late 2008 I wrote that deferred compensation plans or arrangements that are subject to Section 409A (which was added to the Internal Revenue Code pursuant to the American Jobs Creation Act of 2004) were required to be fully compliant with the final regulations under Section 409A by January 1, 2009. Thankfully, in January of this year (2010), the Internal Revenue Service (IRS) issued Notice 2010-6, which provided guidance for certain plans that have 'document failures.'

'Document failures' exist when the plan or arrangement fails to comply with Section 409A in 'form.'  For example, Section 409A allows for payment of deferred compensation only upon specific events, including death, disability, separation from service, change in control, unforeseen emergency and a specified date or fixed schedule. Payment events other than those listed above do not comply with Section 409A. In the event that the plan or arrangement fails to comply with 409A, the employee would be required to immediately include the full amount of the deferred compensation in income, as well as be subject to the penalties set forth in 409A.

Pursuant to Notice 2010-6, plans containing 'document failures' that are corrected by December 31, 2010 may be eligible for relief, meaning that the employee will not have taxable income and will not suffer the severe penalties of Section 409A. The relief is only available for unintentional document failures.

We are again urging that the following documents, plans and arrangements be reviewed as soon as possible, but no later than December 2010: 

• Deferred Compensation plans or agreements;
• Employment agreements;
• Severance plans or agreements;
• Change in control agreements;
• Stock appreciation rights agreements.

Stark & Stark can assist you in reviewing and amending your deferred compensation plans and agreements and will ensure that they are fully compliant with Section 409A.

If you would like to read my previous article on Section 409A, please click here.

Full post as published by New Jersey Law Blog on March 22, 2010 (boomark / email).