Action Required by December 31, 2007, to Comply with Final Section 409A Requirements

This is a reminder that employers have until December 31, 2007, to comply with the final regulations under Internal Revenue Code Section 409A. We described the main features of Section 409A, which governs various types of deferred compensation, in previous Morrison & Foerster alerts, the most recent of which is available here.

Background

Section 409A has generally been in effect since 2005. Employers have been required to administer deferred compensation arrangements in accordance with Section 409A during a transition period that began at that time. That transition period ends December 31, 2007, and arrangements subject to Section 409A must be amended by year end to comply with the final rules. Noncompliant arrangements that are not amended may subject an employee or other service provider to income tax before any compensation is actually received, and they may result in an additional 20% penalty tax (40% in California).