Highlights of Final Rules For Nonqualified Defined Benefit Deferred Compensation Plans
WHO'S AFFECTED These rules apply to sponsors of and participants in nonqualified defined benefit plans, commonly referred to as Supplemental Executive Retirement Plans (SERPs). These rules do not apply to qualified defined benefit plans.
BACKGROUND AND SUMMARY On April 10, 2007, the IRS published final rules affecting nonqualified deferred compensation plans. These rules provide guidance for complying with the Internal Revenue Code section 409A rules, which were enacted as part of the American Jobs Creation Act of 2004 (AJCA) and finalize the proposed regulations issued on October 4, 2005. These rules:
Identify different types of nonqualified plans;
Provide special rules for identifying the sponsoring employer;
Clarify the written plan document requirement;
Provide guidance regarding payment rules; and
Clarify the interaction between certain qualified and nonqualified plans.
The final rules also include substantial guidance regarding certain types of deferred compensation plans that Prudential Retirement normally does not administer, e.g., separation pay plans, stock option plans, stock appreciation rights, and arrangements between employers and independent contractors. This publication does not address these aspects of the final rules.
Originally, the final rules required employers to adopt written documents for their nonqualified plans by December 31, 2007. On September 10, 2007, the IRS released Notice 2007-78, which extended this document adoption deadline to December 31, 2008, but required plan sponsors to comply with several December 31, 2007 deadlines established by the final rules. However, in response to comments from law firms and retirement industry groups, the IRS provided much welcome relief on October 22, 2007, in the form of Notice 2007-86. This notice replaces the relief that was provided in Notice 2007-78 with broader relief and extends the prior transition relief to December 31, 2008.
ACTION AND NEXT STEPS Plan sponsors should review the information provided in this publication to determine how the new rules impact the operation of their plans and whether current plan documentation must be updated. Although the IRS has provided relief until December 31, 2008, plan sponsors are encouraged to begin taking steps early to ensure compliance by the deadline. Plan sponsors should always consult their defined benefit plan’s enrolled actuary before making any plan design changes.
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