Extension of 409A Compliance: What's it mean?

The IRS announced today that taxpayers will have until December 31, 2008, to comply with the 409A regulations. The regs were finalized in April of this year, and had an initial compliance date of year-end 2007.

So what does this mean for privately held companies -- our clients and would-be clients? Short answer: not much.

• The period for which companies are held accountable to 409A stretches back to December 31, 2004, so postponement does not mean you get to delay your attention to 409A. In fact, quite the contrary. The longer companies put off 409A-compliant valuations, the more valuations will have to be conducted retrospectively. Retrospective valuations can be time-intensive and costly.
• Contemporaneous valuations are widely held to be significantly more defensible than retrospective valuations. To take full advantage of the safe harbors allowed by the IRS, you should get in compliance early, and stay in compliance.
• The good news is that the mad rush for valuations (among procrastinators) has apparently been postponed. So, if you're not yet compliant, you can still beat the mad rush. Not a bad idea, considering the alternative is less robust and more expensive.