PwC alternatives

IRS extends deferred compensation transition relief

While the rules relating to deferred compensation plans have continued to be of particular interest to the hedge fund industry, the Treasury Department has just issued Notice 2006-79 (the “Notice”), which provides another one year extension of the existing transition relief for nonqualified deferred compensation arrangements that will be subject to the requirements of the regulations under Section 409A. The extension of transition relief generally applies to all affected arrangements under section 409A, except certain discounted stock options subject to backdating concerns. The Notice extends the deadline for many aspects of complying with section 409A until December 31, 2007. The Treasury Department and the IRS anticipate that the final regulations will be published in 2006; however the date for them to go into effect will be January 1, 2008. This will allow hedge fund managers and taxpayers additional time to comply with Section 409A.

Of particular importance to hedge fund managers in the Notice are:

• Good-faith operational compliance with the statutory requirements of Section 409A continues to be required until December 31, 2007.
• Plans must be amended to comply with 409A by December 31, 2007.
• Elections to change the time and form of payment of deferred compensation may be made through December 31, 2007, but no election made in 2007 may move compensation into or out of 2007 if it would otherwise be payable in 2007.

Amendment and operation of plans adopted on or before December 31, 2007. Plans must be operated in reasonable, good faith compliance with the provisions of section 409A and the applicable provisions of Notice 2005-1 and any other published guidance effective before January 1, 2008. Plans must be amended on or before December 31, 2007 to conform to section 409A and the final regulations thereunder. For periods prior to January 1, 2008, compliance with the proposed or final regulations is not required, but will be deemed to be reasonable, good faith compliance with section 409A. Plans may comply with Notice 2005-1, the proposed regulations or the final regulations for this period. The Notice reconfirms that a participant's actions under a plan with respect to that participant's benefits in a manner that violates section 409A will not cause the whole plan to fail if the plan is otherwise operated in good faith compliance with the Code.

Change in payment elections or conditions before December 31, 2007. The ability to make a change in the time or form of payment of deferred compensation has been extended through December 31, 2007. As is provided under the proposed regulations with respect to such elections in 2006, with respect to an election to change a time or form of payment made during 2007, the change may apply only to amounts that would not otherwise be payable in 2007 and may not cause any amount to be paid in 2007 that would not otherwise be payable in 2007. In addition, under the Notice, a deferral election may be made with respect to an amount that is payable in the year of vesting or within 2 ½ months thereafter, so long as the election is made before January 1, 2008 and before the year in which the amount would otherwise have been paid.

Specific advice and assistance may be sought from your PricewaterhouseCoopers engagement team or from any of the Partners in our Alternative Investment Management Practice.