Sept. 3, 2008

Is your fund ready to meet the approaching deadline for updating nonqualified deferred compensation plans?
The final transition period for compliance with Code Section 409A tax rules for nonqualified deferred compensation plans ends on Dec. 31, 2008. By this deadline, fund managers must bring their compensation-based arrangements into full compliance with the requirements of Code Section 409A. 

Code Section 409A covers all types of compensation arrangements (oral as well as written), including back-to-back deferrals, employment agreements, offer letters, severance arrangements and bonus and other incentive arrangements. The code also imposes significant tax penalties for noncompliance, including a 20-percent penalty tax assessed against the individual who receives the compensation.

In consideration of these changes, fund managers should be aware of the following key requirements with respect to planning their nonqualified deferred compensation arrangements:

• Documentary compliance: Compensation arrangements must be in writing with terms that are in compliance with the final regulations no later than Dec. 31, 2008.
   

• Good faith compliance applies through 2008: Through the end of 2008, nonqualified deferred compensation arrangements must be operated based on a reasonable, good faith interpretation of Code Section 409A and Notice 2005-1 and/or the final regulations.
   

• Payment elections: The transition relief permits changes in the time and form of payment for nonqualified deferred compensation through Dec. 31, 2008. However, such plans may not be amended in 2008 to cause an amount to be paid in 2008 that would not have otherwise been payable or to extend the time of payment for an amount otherwise payable in 2008. In light of the impending end of this transition relief, any amendments to deferral arrangements that are intended to delay the original payment date or change the form of payment must be made no later than Dec. 31, 2008. It is too late to take advantage of this relief for payments that are payable in 2008.

In light of its broad scope, Code Section 409A applies to arrangements that go well beyond the traditional concept of deferred compensation. Consequently, fund managers will need to make key decisions by the end of 2008 regarding how they will apply these rules. These decisions will potentially have a major impact on the operation of their plans for many years to come. 

We do not expect this Dec. 31, 2008 deadline to be further extended. 

If you have further questions about this matter, contact David Simonetti at 212.542.9844.

David Simonetti
Senior Manager
Compensation and Benefits
666 Third Avenue
New York, N.Y.
212.542.9844
David.Simonetti@gt.com

This document supports Grant Thornton LLP’s marketing of professional services and is not written tax advice directed at the particular facts and circumstances of any person. If you are interested in the subject of this document we encourage you to contact us or an independent tax advisor to discuss the potential application to your particular situation. Nothing herein shall be construed as imposing a limitation on any person from disclosing the tax treatment or tax structure of any matter addressed herein. To the extent this document may be considered to contain written tax advice, any written advice contained in, forwarded with, or attached to this document is not intended by Grant Thornton to be used, and cannot be used, by any person for the purpose of avoiding penalties that may be imposed under the Internal Revenue Code.