On October 4, 2006, the Internal Revenue Service and Treasury Department issued transition relief in the form of Notice 2006-79 on Internal Revenue Code Section 409A. Section 409A regulates non-qualified deferred compensation, including discount stock options and severance arrangements.
The notice extends Section 409A transition relief through December 31, 2007, with the exception of Section 16 insiders who were granted discount options.
The notice and a press release specify that the final regulations will be issued before the end of 2006 and will be effective on January 1, 2008.
Plans adopted prior to December 31, 2007 will be able to operate in good-faith compliance with Section 409A as long as they are amended by December 31, 2007. Compliance with Notice 2005-1, or any guidance issued before the final regulations are effective is sufficient to show good-faith compliance.
The notice carves out discounted stock rights from the transition relief. The transition relief does not allow extension of relief past December 31, 2006 for stock options or stock appreciation rights that: were granted with respect to the stock of a public company (at the time of the grant); were granted to a person who (at the time of the grant) was required to file disclosure pursuant to Section 16 of the Securities Exchange Act of 1934; and involve a case where, with respect to the stock option or stock appreciation right, the issuer reports or expects to report a financial expense due to the exercise price discount that was not reported on the financial statements for the period of the grant. There is no materiality threshold.
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