Section 409A of the Internal Revenue Code of 1986, as amended (the “Code”) provides rules governing the taxation of non-qualified deferred compensation plans. Final Treasury Regulations for Code Section 409A were issued on April 17, 2007. The transition period for compliance with these Treasury Regulations is set to expire on December 31, 2008. Plan documents must be reviewed and amended to be written in accordance with the Final Treasury Regulations by such date.

Section 409A of the Code provides that amounts deferred by an employee or other service provider under a “non-qualified deferred compensation plan” are included in income when deferred, or, if later, when they are no longer subject to a substantial risk of forfeiture, unless the plan complies with requirements under Code Section 409A. These requirements relate to the timing of elections, the events upon which distributions can be made, and the funding of benefits.

A non-qualified deferred compensation plan is generally defined as any plan that provides for the deferral of compensation. A deferral of compensation occurs when a service provider receives a “legally binding right” to compensation in one year but does not actually receive (and is not deemed under “constructive receipt” principles to have received) that compensation until a later year.

Contracts that may be included within the scope of Code Section 409A include executive employment (or compensation) agreements, change of control agreements (and change of control provisions in employment contracts), and director compensation agreements. However, the term does not include qualified employer plans (such as Section 401(k) plans and other plans qualified under Section 401(a) of the Code, Section 403(a) or (b) annuity plans or contracts, governmental plans, SEPs, simple retirement accounts, and Section 457(b) plans), or any bona fide vacation leave, sick leave, compensatory time, disability pay, or death benefit plans. If a plan fails to comply with Code Section 409A, the employee or service provider loses the benefit of the deferral of compensation and must include the income currently. The employee or service provider must also pay interest and a 20 percent additional penalty on such compensation.

If you have not yet reviewed and/or amended in writing your deferred compensation plans, please consult your attorney as soon as possible.

Julia Turk can be reached at 312/840-7033 or jturk@burkelaw.com.

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