IRS Issues Transitional and Other Guidance Relating to New Requirements for Non-Qualified Deferred Compensation Arrangements

By Marian Tse, Matt Guiliani, Dan Condon, Kris Wardwell and Lynda Galligan

Originally published December 23, 2004

As was described in our October 2004 article*, the recently enacted American Jobs Creation Act of 2004 added new Section 409A to the Internal Revenue Code. Section 409A substantially changes the federal income tax treatment of non-qualified deferred compensation ("NQDC") arrangements maintained for employees, directors, and other individuals who provide services. Failure to comply with the new requirements will result in early taxation of NQDC, as well as a 20% penalty tax and additional interest payable to the IRS. These new rules generally are effective January 1, 2005, but the statute grants the IRS authority to issue transition rules and to provide guidance regarding a number of significant issues concerning the new requirements.