Category Archives: Final 409A Regs

Correcting Operational Failures in Non-Qualified Deferred Comp Plans

With the applicability dates for the Final 409A Regs looming, the IRS has released Notice 2007-100, which contains corrections to unintentional operational failures. The applicable words are “unintentional” and “operational”. Notice 2007-100 is clear that these corrections are not available for intentional failures, and they are not available for plan document failures.

Notice 2007-100 also states that the IRS is considering a formal correction program for certain operational failures to comply with Code section 409A which do not qualify for relief under Notice 2007-100.

[tags]Pension Protection Act, ppa, Notice 2007-100, NQDC, nonqualified deferred compensation, non-qualified deferred comp, ERISA[/tags]

Savings Clause Now Disregarded in Deferred Comp Plans

Trends come and go in writing plan documents. The hottest trend over the last year, especially for non-qualified deferred compensation plans, has been to include a savings clause when writing plan documents or amendments. David E. Morse, of K & L Gates, in a great summary of the Final 409A Regs, describes savings clauses as language inserted into the plan document “along the lines of, ‘Notwithstanding anything else to the contrary, if we goofed and left something out or incorrectly interpreted the rules of IRC Section 409A, the Section 409A rules trump the plan terms’.

In the Final 409A Regs, the IRS states that savings clauses will be disregarded. In the preamble to the Regs, the Service included this paragraph:

Commentators asked whether a savings clause would be sufficient to ensure compliance with section 409A, where the savings clause provides that each provision of the plan will be interpreted to be consistent with the requirements of section 409A and that any provision of the plan that does not satisfy such requirements will be of no force or effect. The final regualtions provide that for purposes of determining the terms of a plan, general provisions of the plan that purport to nullify noncompliant plan terms, or to supply required specific plan terms, are disregarded. Accordingly, if a plan contains terms that do not meet the requirements of section 409A and these regulations, or fails to contain a plan term necessary to meet the requirements of section 409A and these regulations, the plan will violate the requirements of section 409A and these regulations regardless of whether the plan contains such a savings clause.

Treas. Reg. section 1.409A-1(c)(1), reflecting this language from the preamble, states:

For purposes of determining the terms of a plan, general provisions of the plan that purport to nullify noncompliant plan terms, or to supply any specific plan terms required by this section, section 1.409A-2 or section 1.409A-3, are disregarded.

Of course, the very next paragraph of the preamble states that due to the complex and varied universe of deferred compensation plans, the IRS will not be issuing model amendments at this time.

[tags]Final 409A regulations, 409A, savings clauses, nonqualified deferred compensation, deferred comp, ERISA[/tags]

Compliance with the Final 409A Regs Extended Again

In unequivocal terms today, the IRS extended the deadline to comply with the new Final 409A Regulations from December 31, 2007, to December 31, 2008, for most provisions of these regulations.

In Notice 2007-86, the IRS states that the transition relief scheduled to expire on December 31, 2007, is extended to December 31, 2008. In doing so, the IRS expressly revoked and superceded the transition relief provided in Section III of Notice 2007-78, stating that the relief provided in Section III of Notice 2007-78 did not provide sufficient relief for plan sponsors and service providers to make informed and reasoned decisions before the deadline.

Not everything has been extended. The extension does not apply to predetermined cashout features, or the application of Section 409A(b) for restrictions on certain trusts and other arrangements, as stated in Section IV of Notice 2007-78.

The IRS also provides guidance in Notice 2007-86 on applying this relief. In 2008, plans are to be operated in compliance with the plan’s terms, and consistent with Code section 409A and Notice 2005-1. Where a provision of Notice 2005-1 is inconsistent with the final regulations, the Service states that the plan sponsor may rely upon either Notice 2005-1 or the final regulations. To the extent that an issue is not addressed in Notice 2005-1 or other applicable guidance, the Service states that the plan sponsor must apply a reasonable, good faith interpretation of the statute. Relying on the Final 409A regulations will be treated by the Service as applying a reasonable, good faith interpretation of the statute.

[tags]Pension Protection Act, ppa, pension, nonqualified deferred comp, non-qualified deferred comp, 409A, Notice 2007-78, Notice 2007-86, Notice 2005-1, ERISA[/tags]

FedEx Cup Best Deferred Comp Plan Concept Ever

Georgetown Law is offering a course in Spring 2008 on the Law of ’24″. The course description states:

The award winning Fox Television drama series 24 explores America’s fictional response to international terrorism through the eyes of Jack Bauer, a U.S. counter-terrorism agent. Oftentimes without remorse or regard for the law, Agent Bauer is willing to do what has to be done when faced with the threat of kidnappings, assassinations, nuclear detonations, and bioterrorism on U.S. soil – despite traitors in his family, his unit, and the White House; partisan politics; sleeper cells; and hidden agendas. This course provides a detailed understanding of a very wide-range of U.S. domestic and international legal issues concerning counterterrorism in the context of the utilitarian and sometimes desperate responses to terrorism raised by the plot of 24. Course requirements include active classroom discussion and a paper of approximately 25 pages. is calling this the Best Law School Course Ever. Kudos to Adjunct Professor Walter Sharp for finding a way to engage his audience in an area of the law which can be a little dry and confusing.

Dry and confusing can also be used to described deferred comp plans. ESPN is reporting that the players are unhappy that the FedEx Cup is paying prize money in the form of deferred compensation into the individual player’s tour-based retirement account instead of cash. With the FedEx Cup, it is not just the top prize of $10 million. The 10th place finisher is receiving $500,000 of deferred comp into their tour-based retirement account. Factor in the time value of money (since the player cannot start taking distributions until age 45) and the tax-free (or tax-deferred) nature of the payout, and the FedEx Cup makes a great study in the power of deferred comp plans. I have two law review articles to finish in the next six weeks on other subjects and then I need to find someone willing to let me teach a class on this because the FedEx Cup has made explaining deferred comp plans so much easier.

[tags]pension protection act, ppa, 409A, FedEx Cup, deferred comp, deferred compensation, retirement, employee benefits, ERISA[/tags]

IRS Extends 409A Compliance to December 2008

A few weeks ago, 92 prominent law firms sent a letter to the IRS requesting that the IRS extend the deadline to comply with the new Final 409A Regulations. The firms requested that the deadline of December 31, 2007, be extended to December 31, 2008. (hat tip to the law firm of White & Case).

Today, the IRS issued Notice 2007-78, extending the deadline to adopt plan documents which comply with the new Final 409A regulations until December 31, 2008, subject to limited requirements regarding the timely written designation of a time and form of payment. Notice 2007-78 also provides additional guidance on regarding employment agreements and cashout features of 409A and the final regulations. (hat tip to

Also, in Notice 2007-78, the IRS announced that a future announcement will be issued providing guidance on a voluntary compliance program which will permit taxpayers to correct certain unintentional operational 409A failures and will limit the amount of additional taxes due under 409A.

Finally, in Notice 2007-78, the IRS announced that the relief from application of Code section 409A(b) provided in Notice 2006-33, which expires on December 31, 2007, will not be extended, so that after December 31, 2007, taxpayers must comply with a reasonable, good faith interpretation of 409A(b) with respect to all assets in arrangements subject to 409A(b).

[tags]pension protection act, ppa, 409A, notice 2007-78, notice 2006-33, IRS, Internal Revenue Service, deferred comp, deferred compensation, retirement, employee benefits, ERISA[/tags]

FedEx Cup – A Few More Deferred Comp Details

I recently blogged about the FedEx Cup – a golf championship newly created by the PGA this year where players are awarded points throughout a defined 33-week period. At the end of that period, the 144 players with the most points will then play in a series of 4 tournaments. At the end of the 4th tournament, $35 million in deferred compensation is allocated among 30 of those players, with the top player receiving $10 million in deferred compensation.

It is the deferred compensation nature of the FedEx Cup which caught my attention. For pension geeks, the FedEx Cup is more like watching a reality TV show where players compete for allocation points than it is like a golf tournament. Especially because the FedEx Cup points awarded each week are separate and distinct from the actual monetary prizes for each tournament throughout the 33-week regular season and the 4-week post-season.

I think the FedEx Cup can be analyzed as a deferred comp plan. One of my colleagues today said he it trying to evaluate the FedEx Cup as an incentive pay plan, not as a deferred comp plan. As an incentive pay plan, the FedEx Cup might be interesting but it is the deferred nature of the FedEx Cup which has both sportwriters, golfers and pension geeks watching this golf tournament. As the FedEx Cup group of potentially eligible participants narrowed this week after the Barclay, the age disparity between the potentially eligible participants became even more apparent.

Adam Schupak, a senior writer with Golfweek magazine, has more details about the structure of the FedEx Cup’s deferred nature in his article Deferred Delivery. He provides that the FedEx Cup replaced two different PGA retirement plans after a committee of players and board members discussed deferred compensation plans with several financial advisors.

Unlike the two previous plans, which contained vesting schedules based on a points system, the current plan is 100% vested.

Richard Sandomir, in his article A FedEx Cup Prize Well Worth the Wait in the New York Times (registration required), provides that the minimum distribution age is 45 with the maximum distribution age starting at age 60. If a player plays at least 15 tournaments a year, distribution is delayed until age 60. If a player does not play in at least 15 tournaments a year, distributions begin. Distributions are then spread over a 5-year time frame.

On a side note, attorneys at 92 law firms have signed a public letter to the IRS. In the letter, the firms ask the IRS to extend the deadline for plans to comply with the new Final 409A Regulations to December 31, 2008. The current deadline is December 31, 2007. The firms contend that the December 31, 2007, deadline to comply is not enough time to review existing plans and make any necessary plan amendments. (hat tip to

[tags]409A, FedExCup, FedEx Cup, golf, allocation, points, deferred, comp, compensation, PGA, pension, retirement, ERISA[/tags]

PGA Creates a Deferred Comp Plan Called the FedEx Cup

The PGA seems to have wandered into the pension universe with the FedEx Cup, a deferred-compensation-plan-slash-golf-championship where participants are publically awarded allocation points based on how well they finish in golf tournaments. The number of allocation points determines a participant/player’s share of the $35 million FedEx Cup deferred compensation award. It is the deferred compensation element in the FedEx Cup which makes evaluating it as a deferred comp plan more applicable than evaluating it as a golf championship.

First, evaluate how is the FedEx Cup is funded, and how it will distribute those funds. The PGA’s official website for the FedEx Cup states that the FedEx Cup will award a total of $35 million in bonus money at the conclusion of the playoffs including $10 million to the FedEx Cup Champion. The is reporting that the $35 million is to be paid as deferred compensation, with $10 million in deferred compensation to be paid to the FedEx Cup Champion.

Next, evaluate how the funds in the plan are allocated to participants. The FedEx Cup allocates the $35 million contribution based on points awarded to the participants during the 33-week PGA Tour regular season according to how they finish in each of 36 events held during that 33-week period. Participants can also earn points by playing additional events which are played the same weeks as the World Gold Championship and the British Open. At the end of the 33-week period, the participants with the top 144 point totals are eligible to play in 4 specific tournaments. It is the points awarded in those 4 tournaments which will be used to allocate the $35 million contribution to the deferred compensation plan.

Then, evaluate the plan’s rules on eligibility. For the FedEx Cup, only members of the PGA Tour are eligible to participate and earn points. A non-PGA Tour member, special temporary member or an amateur is not eligible to earn points. Caddies are also not eligible to earn points, and thus are not eligible to receive an allocation of the $35 million contribution. The caddie issue is what prompted the article on

Finally, does the FedEx Cup meet the definition of a deferred comp plan contained in the recently-released Final 409A Regs? At first glance, I think it does. The Final 409A Regs define a nonqualified deferred compensation plan as a plan which provides for the deferral of income. The FedEx Cup provides for a deferral of income.

The Final 409A Regs further provide:

that a plan generally provides for the deferral of compensation if, under its terms and the relevant facts and circumstances, a service provider has a legally binding right during a taxable year to compensation that, pursuant to its terms, is or may be payable to (or on behalf of) the service provider in a later year. For this purpose, an amount generally is payable at the time the service provider has a right to currently receive a transfer of cash or property, including a transfer of property includible in income under section 83, the economic benefit doctrine or section 402(b). Accordingly, a taxable transfer of an annuity contract is treated as a payment for purposes of section 409A.

Unless something goes horribly wrong in the PGA world, the participants in the FedEx Cup will have a legally binding right to their share of the $35 million in deferred comp.

More on the intersection between the FedEx Cup and the Final 409A Regs in coming weeks.

[tags]409A, FedExCup, FedEx Cup, golf, allocation, points, deferred, comp, compensation, PGA, pension, retirement, ERISA[/tags]

Tribune Deal – Another S-Corp with an ESOP

With the release of the Final 409A Regs, the Tribune ESOP deal couldn’t happen at a more interesting time for the ERISA academics among us. Today, Allan Sloan devotes his column in the Washington Post to a summary of the Tribune ESOP deal, which includes the Tribune changing from a C-Corp to an S-Corp after the ESOP is created. Meaning that if all goes well, the Tribune will become another S-Corp with an ESOP. From a plan document standpoint, being an S-Corp with an ESOP was not the best category to be in over the last couple of years.

Dale Oesterle, of the Business Law Prof Blog, gives us a short paragraph on the steps involved in the sale of the Tribune along with a little commentary. [tags]Pension Protection Act, 409A, ESOP, employee stock, tribune, retirement, pension, ppa[/tags]

Carnival of Employee Benefits

Organizing this first Carnival has been very interesting. Here is this week’s link post for a little light Friday reading – Enjoy!

Brian King presents State Universal Healthcare Coverage Initiatives Will Survive ERISA Preemption posted at Brian King’s ERISA Blog.

Susan Mangiero presents the Pension Risk Management Tipping Point posted at Pension Risk Matters.

Prof. Paul Caron posts the ABA Tax Section’s Comments on 409A – 409A – Calculation and Timing of Income Inclusion, Reporting and Withholding at TaxProf Blog.

Lisa Shidler interviews Fred Reish of Reish Luftman Reicher & Cohen about Automatic Enrollment at InvestmentNews.

Silicon Valley Blogger presents So Why Are’t You Opening A 401K? posted at The Digerati Life.

Kathleen Pender writes about how Pension Proposals Would Allow Phased Retirement posted at the San Francisco Chronicle.

Submit your blog article to the next edition of Carnival of Employee Benefits using our carnival submission form. Past posts and future hosts can be found on our blog carnival index page. [tags]Pension Protection Act, 409A, carnival, phased retirement, automatic enrollment, pension, ppa[/tags]

409A Plan Amendment Deadline

When the Final 409A Regulations came out earlier this month, I did a quick read of them, and then put them aside. I planned on getting around to thoroughly reviewing them at some point this summer. Because I concentrate on qualified plans, I wanted to dig into the Final 415 Regs first.

Now it looks like a better plan is devoting the month of May to the Final 409A Regs. When I saw this today on from the law firm of Holme Roberts & Owen LLP, I went back and double-checked the final regs for the applicability date. On page 397 of the regulations, it states:

“(b) Regulatory applicability date. §1.409A-1, §1.409A-2, §1.409A-3 and this section are applicable for taxable years beginning on or after January 1, 2008.”

This means that plans affected by the Final 409A Regs must determine within the next month or so whether they need to amend for the regs, or whether they need to completely restate their plan documents, by December 31, 2007.
[tags]Pension Protection Act, 409A, retirement, pension, ppa[/tags]