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Deferred comp: The IRS provides a dose of relief

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in Small Business Tax

The IRS recently issued final regulations concerning new requirements for deferred compensation arrangements. The final regs established Dec. 31, 2007, as the effective date for full compliance. In a mildly surprising move, the IRS just granted some employers a partial reprieve.

Alert: In a late-breaking IRS Notice, the IRS extended the deadline for documentation compliance by one year to Dec. 31, 2008. (IRS News Release 2007-157, Notice 2007-78) But note that the IRS is standing firm on most of the other requirements covered in the final regulations.

Thus, the IRS expects your business to operate deferred comp plans in accordance with the new requirements throughout 2008 (except for certain documentation requirements).

Here’s the skinny: 
The American Jobs Creation Act of 2004 imposed broad-based, yet highly complex, rules for taxing benefits under nonqualified deferred compensation arrangements. To provide additional guidance, the IRS has issued a series of directives over the past few years. At long last, it released the final regulations on the matter this spring.

Among other requirements, the final regs require employers to have written plan documents that fully comply with the new rules before Jan. 1, 2008. But now the IRS has bowed to pressure from the business community by providing some transitional relief.

According to the new IRS Notice, a nonqualified deferred compensation plan will not be in violation of the final regulations if:

1. The plan is otherwise in operational compliance.

2. The plan documents are amended by Dec. 31, 2008, to retroactively comply as of Jan. 1, 2008.

That’s good news, but there’s still plenty of work for employers to do before Jan. 1, 2008. Significantly, elections concerning deferred compensation arrangements for 2008 must be made before the end of 2007. The new Notice still requires your business to comply with the final regulations, but it gives you more time to document compliance.

Under Notice 2007-78, employers generally may not change the time and form of deferred compensation payments. The new guidance covers other technical issues, including providing transitional relief when employees cash out due to involuntary termination.

Tip: The IRS also announced that it expects to establish a limited, voluntary compliance program that will allow certain unintentional operational failures to be corrected in the same tax year without incurring any penalties.

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