November 12, 2008

Important Reminder!
Year-End Action Required by IRC Section 409A

Does your business have a deferred compensation plan?
What about an option, severance, or equity compensation plan?
Do you have employment agreements in effect?

If so, Section 409A of the Internal Revenue Code may affect your business.  409A, which generally has been in effect since 2005, is now coming to the end of its extended transition period.  IRS Notice 2007-86 extends to December 31, 2008 the transition relief that was to have expired on December 31, 2007 under Notice 2007-78.  2007-78 provides some relief for affected corporations, partnerships, and nonprofit organizations.

Still, companies sponsoring these types of plans are required by the IRS to take some specific actions – including documentation of payment elections and conditions – before the end of 2008.

Failing to have compliant compensation arrangements may subject an employee to income tax before any compensation is actually paid, plus an additional penalty – 20% in California.

To ensure year-end compliance with Section 409A, employers should:

1.   Identify all plans and arrangements subject to 409A, which can include those not traditionally thought of as “deferred compensation plans.”

2.   Determine what must be done before December 31, 2008 to bring plans into compliance.

3.   Adopt and document needed changes before December 31, 2008.

Consultation with a tax professional well before December 31 is strongly recommended.  Do not delay.
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This Legal Update is provided as an educational service by Hoge Fenton’s
Business & Tax Group for clients and friends of the firm.  This newsletter is an overview only, and should not be construed as legal advice or advice to take any specific action. 

If you have any questions, please contact J. Timothy Maximoff, Business & Tax Group Co-Chair, at jtm@hogefenton.com, 408.947.2437 direct.