10 Things You Need to Know About Section 409A


As most executives will have heard by now, Section 409A of the Internal Revenue Code changes the legal landscape for any compensation plan or arrangement that promises a benefit in one year and pays the benefit in a later year. Section 409A effectively removes much of the flexibility that previously applied to most forms of deferred compensation.

1. Compliance deadline is December 31, 2008.

By December 31, 2008, all plans and arrangements subject to Section 409A must be in operational and documentary compliance with Section 409A. There is a limited opportunity to use transition relief for the rest of 2008.

2. Penalties apply for non-compliance.

If a plan or arrangement fails to comply with Section 409A, compensation deferred under the plan for that taxable year and all preceding taxable years is immediately included in taxable income (unless subject to a substantial risk of forfeiture). In addition, the amount included in income is subject to a 20 percent excise tax plus an interest penalty. The taxes and penalties are imposed on each participant who is affected by the failure.


For more information, please contact the Labor and Employment Law Practice Group at Lane Powell:

206.223.7000 Seattle

503.778.2100 Portland



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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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