The IRS has indicated informally that it is working on regulations under the constructive receipt rules as they apply to unfunded, nonqualified deferred compensation plans. The regulations could address the timing of deferral and distribution elections - an issue that the IRS has consistently interpreted more conservatively than the courts. However, the new rules have not yet been approved at the more senior levels at IRS and therefore there is no guarantee we will see these new regulations at all.

Historically, the IRS has applied the constructive receipt doctrine very rigidly to unfunded, nonqualified deferred compensation arrangements, at least in granting private letter rulings. In general, the IRS requires that elections to defer compensation be made in the year before the employee performs the services for which the compensation is payable. In addition, participants may not later choose forms of distributions or change other elections.

However, many employers have been willing to permit elections outside the IRS guidelines because the courts have traditionally permitted subsequent elections in many circumstances. For example, some employers allow plan participants to choose their forms of distribution up to as late as a year before the year in which payment is due. Although there is support for this in case law, there is no guarantee that the IRS would not challenge the arrangement.

Informal indications from the IRS are that it may be willing to revise its position. For example, we understand that the IRS is looking at allowing an employee to defer a discretionary bonus shortly before the bonus is payable, even though the services giving rise to the bonus already have been performed at the time of the deferral election. The IRS probably would take a tougher stance with respect to nondiscretionary bonuses. In addition, we understand the IRS is considering allowing subsequent elections to be valid if made in the year preceding the year in which payment originally was expected to be made. Lastly, the IRS may willing to allow "mirror plan" elections where the nonqualified plan provides that the optional form of payment chosen under the qualified plan will also be the form in which the nonqualified plan benefits are paid.

Although this information comes from unofficial sources within the IRS, we do know that these issues have been of concern to the IRS, employers and practitioners. Employers and practitioners, at least, would welcome any easing of the IRS position on these issues.