Have Your Deferred Compensation Plans Been Reviewed for 409A Compliance?
Credit Union Advisor, 2006 Fall

Non-qualified deferred compensation plans became subject to strict new requirements effective January 1, 2005, and most plans will need to be amended to comply with the new rules. Although the IRS has not issued final regulation guidance, the date to amend plan documents for 409A compliance has recently been extended until December 31, 2007.

The definition of deferred compensation is very broad and will include compensation deferred through employment agreements, severance agreements, and more traditional deferred compensation plans. The rules effect arrangements regardless of whether they are unfunded or funded through life insurance, investments, or a rabbi trust.

All elections to defer salary must be made before the beginning of the calendar year in which amounts would have otherwise been received as compensation. Generally, participant elections to defer 2007 compensation must be made by December 31, 2006. Under some plan designs, credit unions and plan participants may find it advantageous to take advantage of a transition rule and change the time or form of distribution payments—an election that must be made by December 31, 2006.

The new rules can be complicated, and we recommend that all plans be reviewed before the end of this year.