The following is not meant to be legal advice.
On April 10, 2007, the Internal Revenue Service (IRS) issued final regulations under Section 409A of the Internal Revenue Code of 1986. Up to December 31, 2007, taxpayers may continue to rely on the current standard of good faith compliance under Section 409A. The final regulations will be effective January 1, 2008.
Even with the final regulations, the method for calculating and reporting income subject to section 409a tax may still be uncertain The final regulations do not contain guidance on the calculation of amounts required to be included in income upon a violation of Section 409A. Reliance remains on the guidance provided in IRS Notice 2006-100 and Notice 2005-1. Withholding and reporting is not addressed in the final regulations.
All severance arrangements, equity-based compensation arrangements, and nonqualified deferred compensation plans that extend beyond December 31, 2007, should be reviewed for compliance with the final regulations. These arrangements and plans should be revised where necessary to bring into compliance with the final regulations. This means that even if they were previously revised to comply with the proposed regulations, they need to be looked at again because the proposed regulations differ from the final regulations. This may be a lesson to some not to take proposed regulations too seriously, and wait for the final regulations to offset unnecessary work. The arrangements revised to comply with proposed regulations may not extend beyond December 31, 2007. The deadline for revising the arrangements to comply with the final regulations is December 31, 2007.
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