IRS Misses Opportunity to Simplify Section 409A Rules

The trend of intense tax regulation of executive compensation continued last week when the IRS published 240 pages of proposed regulations interpreting Section 409A of the Internal Revenue Code. The regulations have been much anticipated in light of the sweeping changes to the rules governing nonqualified deferred compensation arrangements mandated by Section 409A and the initial deadline of December 31, 2005 for documentary compliance. Combined with SEC, stock exchange, and institutional investor attention to executive compensation matters, the proposed regulations underline the care with which executives, corporate boards, and their advisers must approach these matters.

While the new rules are helpful in certain aspects (most notably the extension of the deadline for documentary compliance until December 31, 2006), the problem with the new rules is that "there are too many rules." The IRS on several occasions had the opportunity to grant relief in the form of a bright-line