California’s Franchise Tax Board (the “FTB”) has issued a statement in its May 2008 edition of Tax News, essentially following Internal Revenue Service Notice 2007-100 (pdf), which established a pilot correction program to enable employers to correct certain minor administrative errors in

deferred compensation arrangements subject to Internal Revenue Code Section 409A. California’s reporting requirements under this correction program are less onerous than those of the IRS – taxpayers will not be required to submit additional statements to the FTB as attachments to their income tax returns – but the substantive requirements of California’s transitional relief follow the IRS pilot program.

While these correction programs are available for administrative problems, employers are to be reminded of the December 31, 2008 deadline to bring the documentation of their programs into compliance with Section 409A. As noted in a previous Morrison & Foerster alert, compensation

arrangements potentially subject to Section 409A include not only traditional deferred compensation plans, but also payments under severance agreements, employment agreements, change in control and retention agreements, discounted stock options, and other forms of equity compensation such

as restricted stock units or “phantom” stock.

Any such arrangement that is not brought into compliance with Section 409A by the final deadline of December 31, 2008 may cause the compensation to be taxed before it is paid and cause the employee to incur an additional 20% federal tax (plus an additional 20% in California). Interest may also apply. Although the IRS granted companies a final twelve months to bring their compensation

arrangements into documentary compliance by extending the transition period for amendments to December 31, 2008 (as noted in our November 2007 alert), every indication is that this deadline will not be extended again.

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