In a press release, the Treasury Department said the final regulations generally implement the rules provided in the proposed regulations published on September 30, 2005, with amendments based on numerous public comments. The effective date of the regulations is April 17, 2007 and is applicable for taxable years beginning on or after January 1, 2008.
Section 409A generally provides that unless certain requirements are met, amounts deferred under a nonqualified deferred compensation plan are includible in gross income, at least to the extent they are not subject to a substantial risk of forfeiture and have not been previously included in gross income. Previous guidance established that any tax-qualified plans, short-term deferrals, stock appreciation rights, or certain health reimbursement plans are not deemed to be includible. Amendments in the final regulations include clarifications of the definitions of these arrangements.
The final regulations refer to additional notices previously issued by the IRS providing transition guidance. Since 409A is effective for arrangements after January 1, 2005, the transition guidance addresses how to report amounts deferred in previous years and how to handle outstanding stock rights.
The final regulations are available here.
Split Dollar Life Insurance
Along with the final 409A regulations for NQDC plans, the IRS issued Notice 2007-34, which addresses the application of Section 409A to split dollar life insurance arrangements.
Because certain types of split-dollar life insurance arrangements provide for deferred compensation as defined in Section 409A, the requirements apply to such arrangements, according to the Notice. Split-dollar life insurance arrangements that provide only death benefits to or for the benefit of the service provider are excluded from coverage under section 409A, as well as arrangements that provide a legally binding right to amounts that are included in income in accordance with the exception for short-term deferrals under Section 409A.
According to the Notice, Section 409A taxation regulations apply to any split-dollar life insurance arrangement entered into after September 17, 2003 and, if an arrangement entered into on or before September 17, 2003 is materially modified after September 17, 2003, the arrangement is treated as a new arrangement entered into on the date of the modification. The notice clarifies what constitutes a material modification to these arrangements.
Since Section 409A is not effective with respect to amounts deferred in taxable years beginning before January 1, 2005, the notice also clarifies what is considered a reasonable calculation of grandfathered amounts within split dollar arrangements.