Section 409A Compliance Deadline: December 31, 2008

In 2007, the IRS issued final regulations interpreting the requirements imposed on nonqualified deferred compensation arrangements by Section 409A of the Internal Revenue Code. The final regulations were effective January 1, 2008, but the IRS has previously extended the deadline for arrangements to be in written compliance with Section 409A. All nonqualified deferred compensation arrangements must be in written compliance with the final regulations by December 31, 2008.

Substantial time may be necessary to bring arrangements into compliance with Section 409A. The amount of time necessary to bring arrangements into compliance depends on several factors, including the number and complexity of arrangements, the design choices involved, and obtaining the required consents or approvals (e.g., board of directors, compensation committee, employees, etc.). Employers are encouraged to contact legal counsel as soon as possible to ensure that their arrangements can be brought into compliance before the end of this year.

Penalties For Non-Compliance

The failure to comply with the applicable requirements of Section 409A can result in significant adverse income tax consequences. Generally, vested deferred amounts of the employee or independent contractor will be immediately taxable and will be subject to an additional 20% tax, plus interest. The employer providing the deferred compensation could be subject to penalties if it fails to withhold taxes or report the income.

Employers Subject To Section 409A

All employers may be subject to Section 409A, including small businesses, public companies, private companies, non-profit entities, and governments and governmental units.

Arrangements Subject To Section 409A

Common types of arrangements that may be subject to Section 409A include:

• Traditional nonqualified deferred compensation plans
  
  
• Employment agreements
  
  
• Offer letters
  
  
• Reimbursement arrangements
  
  
• Severance arrangements
  
  
• Bonus/incentive plans
  
  
• Stock options
  
  
• Stock appreciation rights
  
  
• Equity incentive plans and award agreements
  
  
• Post-retirement benefits
  
  
• Tax equalization agreements
  
  
• Phantom stock
  
  
• Restricted stock units
  
  
• Performance units
  
  
• Change in control agreements
  
  
• Split-dollar life insurance arrangements
  
  
• Supplemental executive retirement plans ("SERPs")
  
  
• Excess benefit plans
  
  
• Tax-gross up provisions
  
  
• Section 457(f ) plans
  
  
• Director deferred compensation arrangements
  
  

409A Recommended "To Do" List:

Before December 31, 2008, all of the following should be completed:

1. Identify all arrangements, agreements, plans and policies that may constitute deferred compensation. In general, arrangements under which an employee or other service provider has a legally binding right during a taxable year to receive compensation that is (or may be) payable in a later taxable year may be subject to Section 409A. This includes arrangements entered into before January 1, 2005 and still in existence (e.g., an employment agreement, particularly one with severance provisions).
   
   
2. Have legal counsel review each arrangement and prepare amendments to arrangements as necessary. For arrangements not in writing, have legal counsel prepare written documents to comply with Section 409A.
   
   
3. If necessary, obtain approval from the board of directors or the compensation committee for new arrangements or amendments to existing arrangements. Be sure to budget sufficient time for all necessary approvals.
   
   
4. Have legal counsel review and revise employee communications, enrollment forms, election forms, etc. so that they comply with Section 409A and are consistent with the corresponding arrangement.
   
   
5. Communicate to employees, officers, directors, or independent contractors, as applicable, any changes in the terms of the arrangements that have been or need to be made. Employers may need to obtain the consent of employees, officers, directors, or independent contractors to modify existing arrangements. In some cases, negotiations may be necessary. Be sure to budget sufficient time for all necessary consents and any negotiations.
   
   
6. Coordinate with HR and payroll departments to make sure the arrangements are being operated in compliance with Section 409A and in accordance with their terms and that appropriate payroll codes and processes are in place for reporting and withholding amounts subject to Section 409A, if applicable.
   
   
7. Consider whether Securities and Exchange Commission ("SEC") reporting requirements apply to new or modified plans or agreements and make any necessary filings. If a plan is registered under a Form S-8 with the SEC, have legal counsel amend the plan prospectus, if necessary.
   
   

For an in-depth review of various provisions of Section 409A, click on the following link to view "409A: Redefining the Approach to Compensation," a seminar presented by the Powell Goldstein Employee Benefits and Executive Compensation Group.

www.eventstreams.com/pogo/027bap

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.