Life insurance groups, as well as the legal community, remain hopeful that the Treasury Department and Internal Revenue Service will issue a full, one-year extension of the effective date of the final rules on nonqualified deferred compensation plans under Code section 409A.
Currently, the new regulations are scheduled to be effective Jan. 1, 2008.
Sec. 409A covers many deferred compensation contracts, for example, some split-dollar life insurance arrangements, stock option plans and severance benefits–that have not traditionally been thought of as providing deferred compensation, according to Larry Raymond, president of the Association for Advanced Life Underwriting.
The AALU is one of the groups lobbying the agencies for a full-year deferral. Besides the insurance industry, these include the American Bar Association’s Section of Taxation and a group of 96 prominent law firms.
Raymond explained that many employers use life insurance as a means of financing deferred compensation plans. “It is important that employers have sufficient time to take the difficult and significant steps required for compliance with very complicated rules,” he said.
The final regulations were published in April.
Raymond said the IRS and Treasury have provided limited relief under Notice 2007-78 by extending some of the documentation requirements for one year. However, he said, “that relief is not sufficient because plan sponsors would still need to be in full operational compliance with the final regulations by the end of 2007.”
To be in full compliance, he said, plan sponsors would still need to analyze the regulations, decide what changes should be made, and implement such changes operationally by the end of this year. He said the AALU is concerned about the difficulty for many employers to complete this process properly in the short time remaining.
He also noted that some significant issues are unclear or have not been addressed.
For example, Notice 2007-78, which was primarily intended to provide relief, includes considerable new guidance about several basic concepts, including the exceptions for severance pay plans and when an employee experiences a separation from service.
“AALU understands that the IRS and Treasury recognize these concerns, are seriously considering alternatives for providing possible relief, and recognize the time-sensitivity of reaching a decision,” said Raymond.
He noted, however, that “while prospects for relief have improved, AALU believes it would be advisable for plan sponsors to continue taking steps toward compliance with the year-end deadline unless and until the IRS and Treasury signal that further extensions or relief will be granted.”