The final regulations under Code §409A become mandatorily effective January 1, 2009. To cover the period from 2005 (when Code §409A went into effect) through 2008 inclusive, Treasury and the IRS have issued voluminous interim and transitional guidance. Importantly, this guidance permits a participant to change an existing payment election without: i) having to comply with the very restrictive 409A change payment election rules; and ii) without violating the 409A rules prohibiting acceleration of payment.

In the Preamble to the Proposed 409A Regulations, the IRS first adopted a transition rule which allowed a participant, during 2006, to make such a payment election change, subject to certain conditions. In Notice 2006-79, the IRS extended this transition guidance an additional year, to permit such changes to be made in 2007. Finally, in Notice 2007-86, the IRS extended this election option to the 2008 year. This means that a participant still has time to change an existing payment election under the participant’s 409A plan without having to worry about an impermissible acceleration and without having to comply with the 409A change rules.

What is required to take advantage of this transition rule?

No acceleration into 2008. The participant’s change election must not accelerate into 2008 any payment that would not have otherwise been payable in 2008.

No delay of payments due in 2008. The participant’s change election must not delay beyond 2008 any payment that would otherwise have been payable in 2008. This rule can apply where the amount is payable on the occurrence of an event, as well as to payments stated to be payable in 2008. For example, if a participant is to receive payment of deferred compensation upon separation from service and the participant separates during 2008, the participant may not make an election in 2008 to defer payment beyond 2008 without complying with the 409A change rules.

Multiple changes permitted. During 2008, a participant may make as many changes under the transition rule, as desired, subject to the above rules. A participant also may change an election which the participant has already changed during 2005-2007, under the same transition rule in effect during such years, subject to the above conditions. In effect, the participant continues to have another bite at the apple.

Documentation of elections/impact on restated plan. An employer is not required to have a final 409A regulatory compliant plan until the end of 2008, but the plan must be effective no later than January 1, 2009. Under the final regulations, it is not necessary for the 409A compliant restated plan to address all transitional guidance in effect through 2008. Since these rules are numerous, many employers may elect to not include these provisions in their 409A restated plans, despite the fact that participants operationally elected to take advantage of the interim rules, such as by making new payment elections as described above. If the employer elects not to include these rules in its restated plan, how will the IRS know a participant made such elections under the transition rules? The plan administrator should require that payment change elections be made in writing (or electronically as applicable) and should retain the elections in the plan’s records. These elections will be considered to be part of the plan, as the final regulations indicate that the “plan” may consist of more than one document. The plan administrator may also wish to create documentation indicating that the payment elections are made in accordance with the transitional rules under IRS Notice 2007-86.

In September, SunGard Relius Education will present a full-day Code §409A Workshop to address the final regulations and all of the transition guidance issued over the last year. We will also address what employers and employees must do before the end of the year to satisfy the new regulations. By attending this workshop, you will secure our comprehensive 409A Outline for all guidance issued through July 2008. You will also receive a complementary invitation to our year end Web seminar where we will be reviewing the issues for this year’s December 31 deadline. The Outline and Web seminar are a $285 value. Register online now.