Yearend deadline for nonqualified plans.

To retain tax-deferred status under new IRC section 409A, nonqualified deferred compensation plan administrators must take certain steps by December 31, 2005. According to proposed IRS regulations (www.treas.gov/press/releases/reports/ reg15808004.pdf) issued September 29, 2005, to implement section 409A, initial deferral elections and elections to defer compensation for services performed in 2006 must be made by December 31, 2005, unless the compensation qualifies as "performance-based compensation" (see "Play by the Rules" JofA, Jul. 05, page 46).

Plan sponsors also must act by yearend if they wish to terminate grandfathered plans or allow service providers to cancel a deferral election or terminate participation in the plan. Compliance with other requirements--related to amending plan documents and the period for substituting nondiscounted for discounted stock options and stock appreciation rights--is extended to the end of 2006 under IRS Notice 2005-1 (www.irs.gov/pub/irs-drop/n-05-01.pdf).

Future IRS guidance will address operational rules governing amounts included in income due to a violation of section 409A, offshore funding arrangements, applying the 20% tax and interest penalty, and arrangements triggered by changes in the financial health of the employer. Until the IRS issues further guidance for arrangements between partnerships and partners, taxpayers should continue to rely on Notice 2005-1, Q&A-7.