On September 10, 2007, the IRS issued Notice 2007-78, which permits taxpayers to bring nonqualified deferred compensation plans into documentary compliance with Section 409A of the Internal Revenue Code and the final regulations issued there under. Since the penalties for failing to satisfy Sec. 409A are extremely costly to both employers and employees, we encourage our readers to immediately seek legal counsel and to do their best in the next 90 days to insure their plans satisfy the requirements which are complicated and onerous. Under the final regulations issued April 10, 2007, the effective date for non-qualified deferred compensation plans and arrangements remains January 1, 2008.

Cooley Godward Kronish LLP issued an alert on Sept. 25, 2007 that does a nice job of answering certain anticipated questions, such as:

• What does Notice 2007-78 do?
• Does it delay the effective date of the final regulations under Section 409A until January 1, 2009?
• May we delay providing a designated time and form of payment under our non-qualified deferred compensation plan until December 31, 2008?
• If our non-qualified deferred compensation plan contains a distribution event that is not permitted under Section 409A (e.g., a “haircut” provision), must we amend the plan to remove that provision on or before December 31, 2007?
• If our non-qualified deferred compensation plan provides a 409A-compliant time and form of payment of deferred compensation, may we amend the plan to add or remove a time or form of payment after December 31, 2007?
• Does Notice 2007-78 extend the period during which we may take such actions?
• May we amend our executive’s employment contract to revise the “good reason” definition giving rise to separation pay in order to take advantage of the short-term deferral exception and the double pay exception to Section 409A?
• If we want to amend our non-qualified deferred compensation plan to designate each payment in a series of installment payments as a “separate payment,” may we do so by December 31, 2008?
• What actions should we take before the end of 2007?

To highlight three areas covered by the Cooley Alert that may require action prior to Dec. 31, 2007:

1. Although Notice 2007-78 provides employers with additional time to come into documentary compliance with Section 409A, employers must determine whether their deferred compensation plans and arrangements contain a compliant time and form of payment. If any plan or arrangement does not contain a compliant time and form of payment, then the plan or arrangement must be amended before January 1, 2008.
2. Employers should examine their past stock option grant practices to determine whether any stock options were granted with an exercise price at less than the fair market value of the underlying stock on the date of grant. If any options were granted with an exercise price less than the fair market value of the stock on the date of grant, then the employer has until December 31, 2007 to fix those discounted options.
3. If employers wish to permit deferred compensation plan participants to modify their elections for distributions scheduled to occur after 2007, then the employer must provide the participants with that right, and participants must make their elections, before January 1, 2008.

Click here to read the full alert including answers to the above questions.