IRS Issues Final Section 409A Regulations


On April 10, after keeping the executive compensation community in suspense for the better part of a year, the IRS issued its final regulations under Section 409A of the Internal Revenue Code of 1986, as amended (the “Code”). Although the final regulations are certainly not going to be the IRS’s “final” word on Section 409A matters,[fn1] they do provide comprehensive guidance for most of the key aspects of deferred compensation arrangements and offer a reasonably clear path towards compliance. The final regulations are generally effective on January 1, 2008, but as we discuss below, taxpayers can rely on the final regulations now.

In their informal comments over the past few months, IRS officials had indicated that the final regulations would not make wholesale changes to the rules set forth in the proposed regulations and prior guidance. True to its word, the IRS has used the final regulations to clarify and add flexibility to many aspects of the proposed regulations while retracting only a few of their provisions. As a

general observation, the final regulations give relief to many common deferred compensation administrative practices that were problematic under the proposed regulations but also tighten up a number of provisions in such a way that avoiding Section 409A completely is likely to become more

difficult. In addition, although the final regulations do not impose a significant number of documentary requirements (i.e., requirements to include particular provisions in deferred compensation arrangements), the ones they do impose will require careful attention from drafters to

avoid inadvertent violations.

Because the final regulations weigh in at just under 400 pages, this Legal Update does not attempt to summarize and explain every area they address.[fn2] Instead, we have attempted to highlight the key clarifications offered by the final regulations and point out areas where the IRS has made changes from its prior pronouncements under Section 409A.

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DISCLAIMER: Because of the generality of this update, the information provided herein may not be applicable in all situations and should not be acted upon without specific legal advice based on particular situations.

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