- Compensation Arrangements: Code Section 409A - Traditional Deferral Arrangements
- January 16, 2009 | Authors: Sarah Lockwood Church; Paul A. Kasicky; Kristen Belz Ornato
- Law Firm: Thorp Reed & Armstrong, LLP - Pittsburgh Office
This is the eighth in a series of articles that we hope will provide you with a better understanding of the rules applicable to certain compensation arrangements under Section 409A of the Internal Revenue Code (“409A’”). This installment discusses some of the 409A rules that are applicable to the traditional deferral arrangement – an arrangement where an employee or independent contractor (“service provider’”) elects to defer the receipt of compensation from his or her employer (“service recipient”).
What deferral election rules apply under 409A?
Generally, when talking about an elective program (where the individual makes an affirmative election to defer receipt of compensation), the election to defer payment and the election of the form of payment must be made before the year in which the services are to be performed. For new participants under elective arrangements, initial elections can be made within 30 days after first becoming eligible to participate. For newly-eligible participants under non-elective arrangements, the time and form of payment elections can be made as late as 30 days after the first day on in which the individual first becomes eligible to participate. With respect to performance-based compensation, under certain conditions, an election as to time and form of payment may be made as late as six months before the end of the performance period.
Any subsequent election to delay the time and form of payment is subject to certain restrictions. Generally, any second election cannot be effective until 12-months after the modification is made and must provide for a new payment date that is at least five years from the original payment date.
With respect to an arrangement that is not elective in nature (such as an employment agreement or SERP), the time and form of payment must be fixed on or before the individual has a “legally binding right” to the compensation. This generally means when the agreement is finalized and signed.
Can existing payment elections be modified?
The final regulations (as modified by the administrative extensions) give “service recipients” until December 31, 2008 to amend existing payment elections, so long as payments scheduled to be made in 2008 are not modified. This action must be taken before December 31, 2008 under the Second Extension Notice.
Our first installment provided a brief introduction to 409A, and our second installment discussed the intent of 409A. Our third installment discussed what constitutes a “plan” under 409A, and discussed the terms and conditions that must be contained in a “plan” in order for it to comply with 409A. Our fourth installment discussed the types of arrangements that are not subject to 409A. In our fifth installment we discussed some of the special rules that apply in order for certain equity-based compensation arrangements to be exempt from 409A. Our sixth installment discussed severance pay arrangements that do not satisfy the separation pay exemption from 409A. Our seventh installment discussed reimbursements and welfare benefit arrangements under 409A.