Section 409A of the Internal Revenue Code was enacted in reaction to concerns about the taxation of deferred compensation, especially some of the abuses uncovered in the failure in recent years of several large corporations, including Enron. The law was enacted in 2004, but several extensions were granted of the time to amend plans and arrangements to comply with the new law. Those extensions will come to an end on December 31, 2008. This year it is still possible to make certain types of changes in deferred compensation plans and arrangements without adverse tax consequences, but there will be significant penalties assessed if compliance has not been achieved next year.

This is a good time to review what deferred compensation plans and arrangements are now in effect, whether they need to be amended and how they will be amended. Deferred compensation can be a valuable tool for businesses to provide incentives to executives, but it’s important that the new law be satisfied.