The Treasury Department and IRS have issued guidance regarding transition rules
under section 409A, which provides new rules for nonqualified deferred compensation
The new rules are part of the recently enacted American Jobs Creation Act of
2004. Under sections 885(e) and 885(f) of the legislation, Congress directed
the Secretary of the Treasury to issue guidance regarding the termination and
amendment of certain nonqualified deferred compensation arrangements and to
define a change in ownership or control for purposes of Section 409A, within
60 days and 90 days respectively of enactment of the legislation.
In addition, the guidance defines the arrangements that will be considered
deferred compensation subject to the new rules. Finally, the guidance outlines
the new reporting and employment tax obligations of employers in connection
with section 409A.
Section 409A applies to amounts deferred on or after January 1, 2005. Under
the new rules, a participant must elect to defer compensation prior to the year
which that compensation is earned. There are two exceptions to this rule: (1)
Performance-based compensation; and (2) When an individual first becomes
eligible to defer, he or she has 30 days to elect deferral.