Severance Agreements and Deferred Compensation: Section 409A Action Required by December 31, 2007

Internal Revenue Code Section 409A created new rules for deferred compensation arrangements, governing the timing of elections to defer compensation and the timing for payment of deferred amounts. Final regulations have been issued under Section 409A requiring all deferred compensation arrangements (including certain severance agreements) to be in operational and written compliance by December 31, 2007 . Failure to comply by the deadline may result in immediate taxation of deferred amounts and a 20% income tax penalty.

New rules regarding deferred payments apply not only to traditional deferred compensation plans, but also to other arrangements that have a feature for the deferral of compensation such as some bonus arrangements and restricted stock plans . Employers should also be aware that agreements to pay severance to employees upon termination of employment may be subject to these new rules, unless the severance plan meets one of the applicable exceptions. In addition, health benefits and other welfare benefits paid as part of a severance arrangement may be subject to the new rules.

Employers should review all deferred compensation arrangements, severance arrangements, and employment agreements to confirm that all covered plans and benefit arrangements are in compliance with Section 409A prior to the December 31, 2007, deadline. The new rules also permit existing plans to be amended prior to the deadline to change the timing for future payments and to take advantage of rules permitting immediate distributions for unforeseen emergencies and cashouts of small amounts.

Please contact Jim Paul or Jennifer Krengel at 916-444-1000 if you have questions or need compliance advice and assistance.

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Please note that the information contained in this newsletter is not intended to provide specific legal advice. You should consult with an attorney and not rely on any information contained herein regarding your specific situation.