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Second Round of 409A Guidance Being Circulated for Approval

The IRS and the Treasury Department working group that is focused on Section 409A have completed the initial draft of their second round of guidance. According to AALU’s Washington Report, the working group is in the process of circulating the second round guidance within the Federal government for approval.  Release of the guidance is not expected until August at the earliest, and if the approval process is delayed, it could be as late as September.  The final form in which the guidance will be released is yet to be determined, although proposed and temporary regulations are expected.

While the draft circulating for approval is still subject to revision, there are some positive aspects in the initial draft, including:

• A postponement of the full effective date of the deferral rules. This postponement may be for as much as a year
  
• The ability to grant stock appreciation rights (SARs), limited to public companies under Notice 2005-1, is likely to be expanded to private companies as well

• An exemption may be included for broad based severance plans. The exemption could provide that these plans may not be subject to 409A
  
• Amounts paid within 2 ½ months of the calendar year in which they vest may not be considered deferred compensation

While these developments are encouraging, we stress that the guidance is still in draft form.  It is also expected that a third round of guidance will occur before year-end.

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