In enacting Code §409A, Congress imposed strict deadlines on participant deferral elections made under a nonqualified plan. In general, a participant must make his/her election to defer before the beginning of the taxable year for which the compensation is payable. However, Code §409A contains a special timing rule for “performance-based compensation.” Under the special rule, a participant can make a deferral election with respect to performance-based compensation as late as six months before the end of the performance period. Under current guidance (Notice 2005-1), the IRS defines performance-based compensation as bonus compensation relating to a period of at least 12 months. A bonus program will qualify as performance-based compensation only if: (1) the payment of the compensation is contingent on the satisfaction of organizational or individual performance criteria, and (2) the criteria are not substantially certain to be met at the time of the deferral election. The employer generally should base the bonus program on objective criteria. However, the criteria may be subjective if (1) the criteria relate to the performance of the participant, a group of participants that includes the participant, or a business unit for which the participant provides services, and (2) neither the participant nor a member of his/her family makes the determination as to whether the participant, group or unit have satisfied the criteria. If a participant wants to make a deferral election with respect bonus compensation for the 2005 calendar year, the participant must make a written deferral election no later than June 30, 2005. Employers should note that the special delayed election deadline for performance-based compensation only applies until the IRS issues further guidance. It is likely that additional guidance will impose a less generous deadline.

Plan Amendment Deadline. Under Notice 2005-1, an employer must amend its nonqualified plan by December 31, 2005 to comply with Code §409A, unless the plan is not subject to these new rules. In recent conversations with senior IRS officials, the IRS has indicated that they do not intend to extend the deadline.

SunGard Corbel will present a one-day Workshop on the new requirements governing nonqualified deferred compensation this fall (October-November) in approximately 14 cities. These Workshops will take into account the latest 409A guidance which the IRS expects to release later this summer. As soon as the Workshop cities and the dates are confirmed, we will post these to our Web site. Watch our site for more information on these.