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December 21, 2004
IRS Issues Guidance on Deferred Compensation

The Treasury Department and IRS have issued guidance regarding transition rules under section 409A, which provides new rules for nonqualified deferred compensation plans.

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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 in
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.

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