Eaton Peabody

At long last the IRS issued final regulations under Section 409A of the Internal Revenue Code this past week. The final regulations clarify and explain the rules governing the application of Section 409A to nonqualified deferred compensation plans. The regulations affect service providers receiving amounts of deferred compensation and the service recipients for whom the service providers perform services. The final regulations are effective April 17, 2007. Plans must comply with the final regulations by December 31, 2007.

Section 409A was added to the Internal Revenue Code in 2004 and generally provides that, unless certain requirements are met, amounts deferred under a nonqualified deferred compensation plan for all taxable years are currently includible in gross income to the extent not covered by a substantial risk of forfeiture and not previously included in gross income. We informed you of previous guidance issued by the IRS in the form of Notices and proposed regulations. The final regulations generally adopt the structure and format of the proposed regulations, but do provide some changes and clarifications. Affected plans must be brought into compliance with the final regulations by the end of 2007.

Now is the time to take an inventory of your deferred compensation plans if you have not already done so. When reviewing your plans, it is important to keep in mind that the reach of Section 409A is broad and can apply to traditional employment agreements and severance pay plans in addition to the traditional types of deferred compensation plans such as top hat plans and supplemental executive retirement plans. The Tax Practice Group at Eaton Peabody has the expertise and ability to review your plans and assist you with bringing them into compliance with the final regulations.

If you have questions or would like additional information, please contact Christine Worthen, a shareholder in Eaton Peabody's
Tax Practice Group.

This alert is provided as general information, and is not a substitute for legal or other professional advice.