Law Article Discusses 409A

Article by Joy Mullane of Villanova Law Review Article discusses regulation of Executive Compensation through the tax code, including 409A.

"Section 409A was also enacted in response to popular sentiment. The public was in an uproar over Enron’s pay practices in general and its deferred compensation practices in particular. Enron’s deferred compensation practices allowed executives to access their retirement plans and deplete Enron’s assets while rank-and-file employees were locked out of accessing their retirement plans. In response, Congress enacted section 409A to discourage companies from establishing nonqualified deferred compensation plans that would allow an executive to have a significant degree of control over amounts deferred. While it is too early to make any certain claims regarding section 409A, prior experience suggests that it will share the experience of its predecessors and thus do little to prevent executives from finding a way around the rules to whatever end they desire, or else their employers will pay any imposed penalties."

Stock Option Exchange Programs

Stock Option Exchange Programs (a.k.a. "repricings") on the Rise

From Footnoted.org: "A quick scan of Edgar shows that the pace of companies offering stock option exchange programs seems to be accelerating. We counted over 80 filings that mentioned stock option exchange programs in June 2009, compared to just 11 filings in 2008. Granted, many of those are multiple filings for the same company. Still, it’s hard to ignore the fact that option exchange programs seem to have really taken off lately."

Note on Legal and 409A Issues

From JP Morgan: "The final regulations indicate that such a re-pricing not below the fair market value of the stock on the date of the re-pricing will not, by itself, cause the program to be subject to 409A. Instead, it is treated as a new award exempt from 409A."

Primer on 409A Valuation Methodologies and FAS 157

Good information on valuation techniques from Axiom Valuation

Glitch in 409A Regulations Caused by EESA - TARP Rules for Troubled Banks

Scoop From BenefitsBlog

IRS Notice 2009-49 Clarifies

More From National Underwriter

Update on Costs and Practices for 409A Valuations

"Who's Doing 409A Valuations These Days?" From William Carleton, Esq.

"Industry practice is currently in flux right now. Generally speaking, early stage companies that are not venture backed are by and large not hiring independent valuation firms and instead are determining FMV in other ways. Venture backed companies, on the other hand, still appear to seek the extra comfort of an outside appraisal (depending on your point of view, this reflects an appropriately professional prudence, little different than insisting a startup purchase D&O insurance; or else it reflects an aversion to exposure of firm members who would appear to be qualified, under 409A, as persons “with significant knowledge and experience” at valuations). As Davis Wright attorney Joe Wallin points out on his firm’s startup blog, third party appraisals are not required. At the same time, a formal valuation may be better at shifting the burden to the IRS to prove that a particular valuation is not reasonable. Prices for such appraisals, at least from the “cottage industry” shops and programs, have come down now, within a range of from $3000 to $7000 (some of these providers will commit to doing annual updates at a lower rate). That’s still a lot for most startups to spend these days. And there’s also a question as to whether some investors will respect valuations from some of the lower end providers."

More from NFL on Compensation and Benefits (off topic)

Indy Colts and Peyton Manning run into ERISA Issues

"And that seems to be precisely what Mudd and Moore would be doing, based on this quote from Kennan: “As long as Howard and Tom pay their own taxes for the next six months, they can return to the Colts as paid consultants, I’d say effective right away, based on what the ERISA attorney just told me.”

The “ERISA attorney,” however, is merely a private specialist in the field of benefits law. The U.S. government might disagree with this approach, either as it relates to the lump-sum pension payments that Mudd and Moore have taken, or as it relates to the Colts’ likely intention to treat them as independent contractors, and to not withhold taxes (and not make matching FICA and FUTA payments) from their pay.

Bottom line? Like most things that seem too good to be true because they are, retiring on paper for the purposes of taking advantage of the pension laws likely entails a procedure far more complex than walking out the door one day as an “employee” and returning the next morning as a “consultant.”

Status of 409A Corrections Program; Future of Code Y Reporting

Updates from BNA

"One issue that has arisen in connection with the documentation requirement under §409A is whether documents can be corrected in the first year in which the legally binding right to the deferred compensation arises. Under the §409A regulations, the legally binding right to deferred compensation must be set forth in writing. Also, under the §409A regulations, the deferred compensation plan is deemed to be established as of the date the participant obtains a legally binding right to the deferred compensation, provided the plan is otherwise established by the end of the employee's taxable year in which the legally binding right arises, or by the 15th day of the third month of the subsequent year in some cases. Thus, it would appear that a deferred compensation agreement could be entered into in Year 1, but that arrangement would not have to be documented under a plan until at least the end of that year."

Interesting Thoughts on "Good Reason" - 409A, TARP, 280G

Interesting Commentary from Xtreme ERISA Blog

"Now that the 409A regulations have opened up the door/floodgates (depending on what you may think of as a flood) to the consideration of "good reason' concepts in the law, there are several emerging GR issues affecting non-409A areas. Until 409A, GR was more a colloquial term of use than a term of art - describing a subset of the triggers comprising the "good leaver" notion (for, essentially, non-cause and other acceptable terminations) one sees overseas. As a result, the concept exists in the law itself, and is spreading. Interestingly, there may be the possibility that some of the non-409A uses of GR could circle back to having a practical effect under 409A."

Summary of Intersection of 409A and 457A

LINK From JP Morgan

"Both sections 409A and 457A will, in some cases, apply to the same nonqualified deferred compensation. When this occurs with regard to short-term deferrals, taxes under 457A will be considered a payment under both sections. And, in general, until Treasury and the IRS provide us with further guidance, taxes on earnings under 457A will be considered to pay the taxes under 409A as well."

Further Reflections On NFL Tax Issues and 409A

From the National Football Post

"Since almost every NFL signing bonus of any significance is paid out over a period of at least a couple of years, 409A could have had dramatic consequences if the full value of these deferred payments could be taxed in the year negotiated, not earned, potentially affecting tens of thousands of dollars, even hundreds of thousands, depending on the size of the contracts. Those affected contracts were brought into compliance through language vetted by the NFL Management Council and the NFLPA to allow for the taxation of deferred guaranteed money in the year of receipt rather than in the year of negotiation of the contract. So the problem was solved, although not without additional headaches for players’ tax advisers."

ERISA Industry Committee Seeking Changes to 409A Regulations

ERIC Files Comment Letter

Sends Attorney to Testify on Proposed Changes

Comment Letter


"The comments are divided into the following six general topics:

Assumptions for calculating amounts deferred;

The date as of which amounts deferred during a taxable year must be calculated;

Safe harbors to calculate the premium interest tax;

Determining whether a previously included amount has been permanently forfeited or otherwise lost;

Code Y reporting; and

Other miscellaneous issues."

409A Deferred Comp Plans in Bankruptcy

Rethinking Executive Comp Plans When Cash is Tight

"As the U.S. economy sinks deeper into recession, cash-strapped small business are confronting tough decisions about the life insurance-funded, non-qualified executive compensation packages they’ve established to reward and retain their top talent. To ease the financial strain on their balance sheets, sources tell National Underwriter, firms may need to explore a range of options, from restructuring the plans to a suspension of funding. For many, the one option that isn’t available is to do nothing."

Follow Up On NFL Compensation Issues (off topic)

Law Review Article Discussing Sign On Bonus Tax Issues and Solutions

Do NFL Signing Bonuses Carry a Substantial Risk of Forfeiture within the Meaning of Section 83 of the Internal Revenue Code?

NY Bar Responds to IRS Request for Comments on 409A Documentary Noncompliance

Responds to IRS Notice 2008-113

NY Bar Link

"[W]e propose below a three-pronged program. The first would set out specific, narrowly targeted types of violations which may be viewed as presenting a low probability of abuse and which we therefore view as appropriate for inclusion in a list of correctable violations. The second would relate to those circumstances in which errors are quickly discovered and corrected. The third involves the establishment of a policy of prospective enforcement and liberal transitional relief to allow taxpayers to adapt to new authorities interpreting Section 409A or changes in enforcement approach. Our proposals are intended to facilitate the establishment of a program consistent with Treasury's and the IRS's two identified general principles, while also addressing over the course of our discussion below the seven issues specifically identified by Treasury and the IRS for comment."

409A Too Hard For Law School

From The Conglomerate

"I'm trying to design an executive compensation syllabus. I hope the course accomplishes two things: getting students who are generally interested in the subject (and who isn't these days) thinking in a more rigorous way and preparing (a subset of) students to actually practice in the field. In fleshing out the syllabus, I've run up against a problem - Section 409A of the IRC which establishes rules for deferred compensation. 409A is perhaps the most important topic for compensation lawyers today, touching almost everything that they do. On the other hand, 409A is probably not such a big deal to the general audience. Moreover, the regulations are incredibly convoluted even by Treasury's standards (for just a taste, see Michael Doran's summary (hat tip: Paul Caron)). The rules are so difficult that they've even inspired a blog called 409A Dismay."

American Benefits Council Provides Comments to IRS on 409A

Letter to IRS

American Indian Tribe to Vote on Whether or Not to Comply with 409A

There is a referendum on resolution titled “Amending Board Retirement Plan.” The resolution that was approved is to amend the plan for compliance with the requirements of the Internal Revenue Service’s Code Section 409A. The plan was approved in 1998 for retired tribal board members.

MEDNAX Incurs 409A Excise Tax Reimbursement Costs

10-K

8-K

409A Interim Reporting and Withholding

Article

Notice 2008-115

New America Foundation Says 409A Harming Small Business

Government is Broken For Entrepreneurs. New Government Regulations, Including 409A, Written for Large Companies But Harming Small Companies and Job Creation.

IRS Undecided About 409A Document Correction Program

Persons will document failures would be in better position to amend that Persons in compliance.

"Catherine Creech, principal, Ernst & Young LLP, Washington, D.C., who moderated the program, noted that a plan failure is not technically a violation of Code Sec. 409A if all of the deferred amounts are nonvested. Tackney responded that there is technically a violation, but that nothing is included in income, so there are not tax consequences. He indicated that the plan could be corrected in the current year if the nonvested amounts will not vest until a later year.

Morrison contrasted Code Sec. 409A with Code Sec. 457A . Under the latter provision, deferred amounts are not taxable if the amount is not determinable, she said. For example, an amount payable under a formula based on future profits might be vested but not taxable until the formula is applied. However, under Code Sec. 409A , the taxable amounts have to be estimated, if necessary, in the case of a violation. She said that this treatment reflects a congressional stance that does not favor nonqualified deferred compensation plans and requires inclusion at the earliest time."

More Dismay from 457A

Unanswered Questions Abound - From D&T

"Notice 2009-8 provides helpful information on compliance with IRC § 457A. Application of this section in practice, however, may be complicated for multinational corporations with operations and subsidiaries in different jurisdictions, including corporations that have a US corporation as the parent entity, and for tiered partnerships."

Law Prof Blasts 409A - Should be Scuttled

Supports Curbs on CEO "Pirates" - But 409A Misses the Mark - Hurts All Except CEOs

Article Here

"The Pirates Will Party On! The Nonqualified Deferred Compensation Rules Will Not Prevent CEOs from Acting Like Plundering Pirates and Should Be Scuttled." William A. Drennan, Southern Illinois University School of Law

Abstract
The government went off course when it attempted to stop outrageous CEO compensation schemes with new income tax rules on nonqualfied deferred compensation. IRC Section 409A should be scuttled.

Suggested Citation
William A. Drennan. 2008. "The Pirates Will Party On! The Nonqualified Deferred Compensation Rules Will Not Prevent CEOs from Acting Like Plundering Pirates and Should Be Scuttled"

"CEOs and their sidekicks resemble swashbuckling pirates emptying the coffers of vulnerable prey. Although some argue that CEOs, like professional athletes, must be worth their compensation or corporations would not pay it, structural deficiencies at publicly held corporations impede natural market forces. A Delaware Chancery Court judge stated, “executive compensation seems . . . to have come spectacularly unhinged from the market for corporate talent.”"

409A Dominates the Field of Exec Comp

Changing the Landscape for Years to Come

409A Does Not Require A Professional Valuation

Internal valuation is permitted, although the burden of evidence shifts.

"That is not to say that an independent appraisal may not be advisable or worthwhile. In fact, if done in the manner specified in the final regulations, a valuation will create a presumption that the valuation of the stock reflects the fair market value of the stock, which presumption is only rebuttable by a showing that the valuation is grossly unreasonably."

Final 409A Regs on Tax Calc Under Review by Obama Team

Part of Freeze and Review of All Proposed Regs

Off Topic - Proposal to Use Tax Code to Address US Economic Issues

Centers Around Reduction in Corporate Tax Rate - Here

Tax Pros Make Grim Predictions for Companies that Missed 409A Deadline

Companies may need to offer employees cash make-whole bonuses, or face litigation.

"“If I’m an employee who for whatever reason is assessed a penalty because their employer did not meet 409A requirements, about the only remedy at this point — assuming that employer is willing because they might not have responsibility or liability — is to bonus the employee to cover the penalty and income tax from the bonus itself,” said Sonia Agee, a tax attorney at Hoge, Fenton, Jones & Appel Inc. in San Jose."

409A Nominated for Worst Tax of Bush Era

Vote Here

Final Results

D.C. Insider Believes More Dismay for Executives in 2009

409A Draconian; More Compensation Legislation Coming

"First, Mr. Iwry discussed the near future of executive compensation legislation. After providing the great truism, “it is easier to afflict the comfortable than to comfort the afflicted,” Mr. Iwry explained how it is likely that Congress has yet to finish punishing executives for earning money. While providing no opinion as to whether limiting executive compensation is a laudable goal, Mr. Iwry was simply making the point that it is easier for Congress to hinder the rich through policy changes than it is to make life better for other. Certainly, it is easier to garner support from their constituents for such work. Therefore, despite the recent effectiveness of the Draconian 409A requirements, more is still to come. Ironically, around the time Mr. Iwry was talking , Barney Frank was introducing legislation to further limit executive compensation under the Emergency Economic Stabilization Act."

457A Dismay

Section 457A

From Plan Advisor:

Included in the guidance are answers to (and some examples of ) the following:
What is a nonqualified deferred compensation plan for purposes of § 457A?
What is a substantial risk of forfeiture for purposes of § 457A?
What is a short-term deferral for purposes of § 457A (a § 457A short-term deferral)?
To which types of service providers does § 457A apply?
What is a nonqualified entity for purposes of § 457A?
How is it determined whether an entity is a foreign corporation or a partnership for purposes of determining whether an entity is a nonqualified entity under § 457A?
How is it determined whether substantially all of a foreign corporation’s income is subject to a comprehensive foreign income tax?
How is it determined whether substantially all of a foreign corporation’s income is effectively connected with the conduct of a trade or business in the United States?
When is a foreign person eligible for the benefits of a comprehensive income tax treaty for purposes of § 457A?
How is it determined whether substantially all of a partnership’s income for a taxable year is allocated to persons other than (A) foreign persons with respect to whom such income is not subject to a comprehensive foreign income tax and (B) organizations which are exempt from tax under Title 26 of the United States Code?
Does § 457A apply to deferred compensation that would have been deductible against income of a foreign corporation which is taxable under § 882 if the compensation had been paid in cash on the date that such compensation ceased to be subject to a substantial risk of forfeiture?
When is the determination made whether an entity is a nonqualified entity?
How is it determined whether a nonqualified deferred compensation plan is a plan of a nonqualified entity?
Does § 457A apply to a right to earnings on deferred compensation that is subject to § 457A?
How is the amount includible in income under § 457A determined?
If an amount is included in gross income under § 457A before the amount is paid to the service provider, is the amount also includible in income when the amount is paid to the service provider?
If an amount is included in income under § 457A before the amount is paid to the service provider, and before such amount is paid the right to the amount is forfeited or otherwise permanently lost, is the service provider entitled to a loss?
When is the deferred amount to which a service provider is entitled treated as not determinable for purposes of § 457A?
When is a deferred amount that is treated as not determinable at the time that the compensation is otherwise includible in gross income under § 457A required to be included in income?
What additional taxes apply to a deferred amount that is treated as not determinable at the time that the compensation is otherwise includible in gross income under § 457A?
What is the effective date of § 457A?
For purposes of applying the effective date, how are the periods of service to which the compensation is attributable determined?
How does § 457A coordinate with § 409A?
What transition rules apply under § 409A with respect to amounts covered by § 457A that are attributable to services performed before January 1, 2009?
What transition rules apply under § 409A with respect to amounts covered by § 457A that are attributable to services performed after December 31, 2008?
What transition rules apply under § 409A with respect to certain back-to-back arrangements attributable to services performed before January 1, 2009?

Law Professor Blasts 409A - Questions Enforceability

Professor Drennan notes that 409A is "complex and bizarre" and will impose heavy burdens on small business, charities and their employees; contributes to the erosion of voluntary compliance with tax laws. 40 U. Tol. L. Rev. 53 (2008).

Prof. Drennan.

Hat tip to Roth, CPA.

Hat tip to Tax Prof.

XtremeERISA Blog Contemplates the End of 409A Transition Relief Period

Interesting ideas on Good Reason definitions.

NFL - 409A Update

NFL - 409A Update from National Football Post - "Language Has Been Vetted by NFLPA and NFL Management Council"

"There was a bit of activity on the contract front last week when the Cowboys formalized a deal with tackle Marc Colombo for four years and $22M, with about half guaranteed. The deal was being held up by the 409a tax code issue, which I discussed earlier. There is now language that has been vetted by the NFLPA and the NFL Management Council that allows teams to amend contracts as needed so the player does not suffer tax consequences on deferred bonus money, which virtually all bonus money is."

Article Also Discusses Dallas Cowboys Recent Free Agent Signings and Potential Salary Cap Issues

Dallas Cowboy Performance 12/28 Here.

409A Urban Myths from Feld

Silicon Valley Mythbuster - Here

"Perhaps the only upside to the 409A panic in the start up world has been some of the urban legends that have already popped up. Jason and I aren’t your lawyers, so don’t take this as formal advice, but if your lawyers are advising you of the following, at least ask some questions. We’ve personally heard some senior partners at big-name law firms say some crazy things regarding 409A. The following are actual quotes. We will not disclose names to protect the innocent, er.. guilty."

Companies Busy with Year End 409A Amendments - Sample 8-Ks

Palm, Inc.

Grubb & Ellis Company

3M Company

Pep Boys

Loral Space and Communications

American Eagle Outfitters

The Timberland Company

Chuchill Downs

Cray Inc.

Sysco Corporation

Abercrombie & Fitch

Additional 409A Thoughts For Sports Agents

From Connecticut Sports Law Blog

"A signing bonus is compensation earned by joining a team, but it is frequently paid out over time. For example, let’s say that Jim is an in-demand pitcher. On January 1, 2009 he signs with a team that offers him a $10 million signing bonus to be paid over a five year contract term. Without making sure that the bonus fits within an exception in the 409A regulations, Jim would be receiving non-qualified deferred compensation subject to 409A. That means that Jim would have to pay taxes on $10 million of income in 2009 and be subject to a 20% excise tax on top of that. The result? Jim is only paid the $2 million due for the first year’s payment, and already owes the IRS $2 million in excise tax plus income taxes of approximately $3 million."

NFL Player Agents Warned of 409A Peril

Players Association Sends Urgent Memo

"The NFLPA was clear about the importance of this provision in its memo to all agents: “This memorandum identifies an extremely important tax issue that may affect your player-clients and requires your immediate attention. The NFL has just informed the NFLPA that NFL clubs did not draft or amend many NFL player contracts in order to bring them into compliance with Section 409A of the Internal Revenue Code. As a result, many player contracts that include certain deferred compensation arrangements may not comply with the new tax provisions, thereby resulting in accelerated taxable income and/or an additional 20% tax, imposed on the player-client, unless the contracts are amended on or before December 31, 2008.”"

XtremERISA Blog Discusses 409A and 457A - - Forms the "A" Team

From XtremERISA Blog

IRS Provides Guidance on Withholding under 409A

IRS Notice Here

"This notice provides interim guidance to employers and payers on their reporting
and wage withholding requirements with respect to amounts includible in gross income
under §409A of the Internal Revenue Code. This notice also provides interim guidance
to employers and payers on their reporting requirements with respect to all deferrals of compensation under §409A of the Internal Revenue Code. This notice does not affect the application of §3121(v)(2) or an employer’s reporting obligations under §31.3121(v)(2)-1 of the Employment Tax Regulations. In addition, this notice provides guidance to service providers on their income tax reporting and tax payment requirements with respect to amounts includible in gross income under §409A."

IRS Issues Final 409A(a) Relief Procedures

From PlanAdvisor: IRS Issues Final 409A(a) Relief Procedures


The IRS Notice Here


"According to the IRS notice, the new procedures include:

Methods for correcting certain operational failures during the service provider's taxable year in which the failure occurs and, for certain service providers also during the subsequent taxable year, to avoid income inclusion under § 409A(a).

Relief limiting the amount includible in income under § 409A(a) for certain operational failures during a service provider's taxable year that involve only limited amounts.

Relief limiting the amount includible in income under § 409A(a) for certain operational failures regardless of whether the failure involves only limited amounts, but subject to further required actions to correct the failure.
Special transition relief for certain operational failures occurring before January 1, 2008."

EMCORE Corporation Launches Tender Offer to Fix Employee Stock Options Subject to 409A

"As a result of the Company's previously announced voluntary inquiry into its historical stock option granting practices, which was concluded in 2006, the Company determined that an incorrect grant date was used in the granting certain options. As a result, the options were granted at an exercise price below the fair market value of the Company's common stock as of the correct date of grant. Consequently, employees holding these options face a potential tax liability under Section 409A of the Internal Revenue Code and similar sections of certain state tax codes, unless remedial action is taken to adjust the exercise price of these options prior to December 31, 2008."

EMCORE Press Release

Tender Offer

409A Attorneys Starting to Stress

The 409A Memo

409A - Reminder to Send Your Reminders

Firms Prepare to Say "I Told You So."

Reminder

Reminder

Reminder

Reminder

Reminder

Reminder

409A Valuation Calculator From VC Experts.com

"With the launch of the new 409A calculator, companies can now calculate their stock option prices so that they meet the requirements under Internal Revenue Code Section 409A. The 409A calculator was designed to provide a comprehensive list of "comparable" companies (i.e. similar companies based on industry, valuation and/or geography) and to assist in offsetting the rising cost of outside consultants and auditors as the company CFO's determine fair value."

Press Release

Calculator

Coming Soon to Theaters - Documentary "An Inconvenient Tax"

I received this email from the producer of an upcoming documentary about taxes and tax reform. I thought some might enjoy the movie trailer which is linked below.



Hello, this is Nathan Padgett with Life Is My Movie Entertainment. I'm writing to let you know about the upcoming feature length documentary about taxes and tax reform, "An Inconvenient Tax".


This film sheds light on one of America’s messiest problems — a fundamentally broken tax code that affects every part of people's lives. With the U.S. Congress making over 16,000 changes to the tax code in the last two decades alone, many Americans want something better, but few know where to start. This feature-length documentary film reveals the many ways Congress uses the tax code to achieve political goals that have nothing to do with raising revenue. It also tackles the controversial issue of tax reform through a non-partisan presentation of U.S. tax history and current proposals to fix the code. In a time when America faces fiscal crisis, An Inconvenient Tax brings a crucial exploration of the tax code to the big screen.


We know that the subject matter within this film is a hot topic for your viewers and all Americans alike. While we have yet to begin our major marketing campaign, we are currently contacting specific tax and accounting outlets in hopes that they will be willing to inform their viewers of the film's newly redesigned website and possibly showcase the teaser. I'm including links to the website, press packet, and the teaser.


Feel free to contact us if you have any questions or comments about the film. press@lifeismymovie.com 770-881-7500 ext: 2



Thank you for your interest in our film. Now sit back, relax and enjoy the show,
Nathan Padgett


Website:
www.aninconvenienttax.com


Press Packet:
www.aninconvenienttax.com/downloads/AITpressPacket.pdf


Film Teaser:
www.vimeo.com/2050141




Nathan Padgett

[o] 770-881-7500 ext: 714
[f] 678-748-3106
[c] 404-405-1617

440 South Perry Street Suite #8
Lawrenceville, Georgia 30045
www.lifeismymovie.com

409A Video Clip - Brief Summary From BNA

Not much information, but this is the first (and only?) YouTube offering relating to 409A.

U.S. Watching Wall Street Bonuses - Off Topic

House Oversight Committee Seeks Bonus Data From Banks Receiving Taxpayer Funds

IRS May Waive 2008 Form Y Reporting

IRS May Waive 2008 Form Y Reporting

According to a BNA news report, Treasury Deputy Benefits Tax Counsel Helen H. Morrison said in a recent Clark Consulting Webinar that the IRS expects to issue a notice before the end of 2008 waiving the requirement for reporting this year, "and until such time as we have issued regulations on how to calculate the amount that would be included in income."

Morrison also said the Treasury expects to soon issue proposed regulations on how to calculate amounts that would be included in income due to a failure to meet 409A requirements. The proposed regulations will also "serve as a foundation for providing guidance as to what would be reported for compliant plans," using Code Y on Form W-2, she said.

Forbes Advises Financial Execs on Deferring

Think twice before deferring, and get your money out if you can.

"No. 1: Carefully consider whether to defer any of your 2009 compensation.

No. 2: If you can, elect to accelerate the distribution of your prior years' deferred compensation."

Article notes that WaMu executives used IRS Transition Relief to withdraw deferred compensation prior to meltdown. Form 8-K.

UnitedHealth Group Incurs Costs for 409A Violation

Company Slammed with 409A Tax Reimbursements

Financial Statement Footnote:

"Includes $87 million of pre-tax Operating Costs for the settlement
of Internal Revenue Code Section 409A (IRS Section 409A) surtax
liabilities on behalf of non-officer employees who exercised certain
options in 2006 and 2007, and $89 million of non-cash Operating Costs
for the modification charge due to repricing unexercised options
subject to IRS Section 409A."

WuXi PharmaTech Executives Face 409A Penalty Taxes

Company Executives to sell Stock to Cover Penalty Taxes from in-the-money Options

"...we expect up to 350,000 ADSs may be sold by other management members and employees prior to year-end for 409A purposes. Prior to 2008, a number of our management members and employees who were U.S. taxpayers were granted options with an exercise price potentially below fair market value on the date of grant, as determined under Section 409A of the U.S. Tax Code. To avoid the adverse tax consequences imposed under Section 409A to these U.S. taxpayers, the options were amended previously to require that they be exercised, if at all, on or prior to December 31, 2008 (no other changes were made). If unexercised by year-end those options will expire, and those individuals may need to sell ADSs to pay related taxes and the purchase price payable upon exercise."

IRS Clarifies Calculation Method

IRS Clarifies Calculation of Grandfathered Amounts in Non-Account Balance Plans

John Hancock Podcast Discusses 409A

Listen to Podcast Addressing 409A - sponsored by John Hancock

Wachtell Lipton Calls for 409A Relief.

Wachtell Lipton Critical of 409A Tax; Calls for Relief

"At this point, it is clear that the government’s mandate of complete and error-free
documentary compliance by year end (or ever) is unattainable and unnecessary to achieve its original goals. Treasury and the IRS must take action to delay the documentary compliance requirements of Section 409A. In the absence of a delay, the burden on companies would be significantly eased if the application of the 2008 deadline was limited to the executive officers of public companies (i.e., the
Section 16 officers). Moreover, the IRS should announce that good faith efforts to comply with the final regulations, both in form and operation, will be acceptable. America’s corporate resources should be focused on business matters in this critical and uniquely difficult time, without the worry that a vast portion of its workforce will be subject to a punitive and draconian tax on New Year’s Day."

Others Agree

"It is submitted here that these unexpected and changed circumstances may well justify a reconsideration of the current deadline generally - not because the existing deadline did not confer sufficient time, but because things, simply put, have changed. The need to devote significant attention to Section 409A compliance may be inconsistent with the attention that will have to be devoted to the economic crisis. And, notwithstanding the ongoing bail-out efforts, query whether any exacerbation of the current crisis in the coming weeks might make broader relief downright necessary."

Rumor about a Rumor about a Rumor About Further Extension - from XtremeERISA Blog

IRS Announces Guidance Plan for Next Year; Includes Guidance for 409A Corrections.

2009 Guidance Plan

More Info From PPA Blog

CompensationStandardsBlog Notes That Repricing Options Upwards To Comply with 409A Could Trigger Rule 701 Limits

Repricing Options Upwards Could Trigger SEC Rule 701 Limitations

"Presumably, options whose exercise price is increased to avoid being treated as a discounted option under 409A must also be recalculated for purposes of Rule 701 using the higher option exercise price. Would the recalculation be retroactively performed for the period when the initial grant was made or would the value of the amended option be included in Rule 701 numerical analysis as of the date of the amendment?"

409A Valuations of Private Venture-Backed Companies

Valuation Methodology Explained

"In summary, to value the common stock of an early-stage, privately held company, the appraiser can value the company's BEV using traditional valuation methodologies including the cost, market, and income approaches. But then he must allocate the BEV amongst the company's various classes of securities, and although this may appear to be a complex task, it can be accomplished by a competent appraiser following the guidance of the AICPA."

Article Suggests QSERP Practice May Be Problem Under 409A

Author notes potential 409A issue for QSERPS by virtue of removal of risk of forfeiture.

"These plans must be constructed under IRC §409A rules, which includes a requirement that the SERP funds remain an asset of the company, subject to substantial risk of forfeiture...Moving monies from non-qualified plans into qualified plans provides an immediate tax break for the company, and, in essence, removes the risk and virtually guarantees payment of the benefit to the executives. As deferred compensation, the executive maintains the tax-deferral advantage associated with the benefit, without the inherent risk of forfeiture. It will be interesting to see how this practice relates to 409A rules on deferrals."

Amending "Good Reason" at the last Minute - From CompensationStandards Blog

Interesting discussion on amending the definition of "good reason." Interesting difference of opinion.

"Max correctly notes that this paragraph of the Notice keys the ability to reform the good reason definition on whether the right to payment is “subject to a substantial risk of forfeiture” – not on whether the good reason condition is tantamount to an “involuntary termination” condition under Section 409A. He also points out that the final regulations (§1.409A-1(d)(1)) say that if a right to payment is conditioned on “involuntary termination” it will be subject to a “substantial risk of forfeiture” -- but do not say the converse – i.e., that if a right to payment is not conditioned on involuntary termination it is not subject to a substantial risk of forfeiture (because there other ways to be subject to a substantial risk of forfeiture).

Given that these are two distinct standards (with involuntary termination being a subset of substantial risk of forfeiture), he concludes that as long as the right to payment is still subject to a substantial risk of forfeiture, you can fix at will (for the rest of 2008)."

More From XremeERISA Blogger - Anti-Toggling Rule

Discussion of Anti-Toggling Rule and providing for alternative time and form of payments.

"Under what have come to be known as the anti-"toggling" rules (of Section 1.409A-3(c)), you can generally (unless an exception applies) only have one time and form of payment per particular type of cap-A triggering event.

There may be some emerging informal evidence (rely at your own risk) that, showing some flexibility, Treasury personnel are gravitating to what I'll call a permissible "subset" analysis."

Xtreme ERISA Blog Discusses Unclear Short Term Deferral Issue

Interesting Article Regarding Olympics and Short Term Deferral Rules. Unclear whether this approach is permitted under the regulations.

"So what of a stream of severance payments? If one is terminated on 12/31, only two-and-a-half months' of payments would be made within the S-TD period? Does that possibility doom all but two-and-a-half months' of payments to the Curse of Cap-A?

The answer seems a resounding "no." Under the Regulations as technically corrected, the focus is on whether vesting could occur too long before payment or, stated conversely, whether payment is contemplated to be deferred by too much after a possible vesting event. The focus is not on whether a payment stream might be other than the one that it is. Essentially, you test your stream of payments as it runs, not as it may run. Thus, if the termination is in fact early enough in the year, all of the payments could be S-TDs."

Article on 409A Valuations from Quist Valuation

Article relating to 409A valuations for start-up companies.

"The impact and pressure to appropriately price equity grants has just begun. While many companies will continue to price stock options using their own internal expertise, the proposed IRC 409A rules have created a signficant demand for independent valuations. Numerous law firms have concluded that the Independent Appraisal Presumption, which is a valuation performed by a qualified indepedent appraiser is the clearest presumption available under the regulations and provides the best protection against the consequences of IRC 409A."

409A and "Regulatory Cousins" Leading Private Companies to Valuations

http://www.aboutbusinessarticle.com/2008/07/27/section-409a-and-its-regulatory-cousins-what-it-means-for-private-companies/

"The IRS recently threw down the gauntlet and placed pressure on private companies to get their valuations right at no matter what stage of development they are. The Service has backed up this gesture by exposing private companies to substantial tax liabilities and penalties if they do not."

Manpower Blog Posts 409A Cheat Sheet

409A Cheat Sheet from Manpower Blog

Good Summary of 409A Correction Steps

Summary of IRS Correction Steps from Prudential Retirement

CPA Speaks Out

Criticizes Congress for 409A

IRS May Soon Solve School Teacher 409A Problem

IRS expects that upcoming guidance will solve problem of recurring part-year compensation for school teachers.

"The regulations to be proposed are expected to address certain types of arrangements involving recurring part-year compensation, including common arrangements involving public school employees who provide services during a 10 month school year and elect to be paid ratably over 12 months. It is expected that the regulations would provide that if certain conditions described below are satisfied, §457(f) would not apply to such arrangements. It is also expected that a conforming change will be proposed for regulations under § 409A, so that § 409A also will not apply to such arrangements if such conditions are met."


NOTE FROM TEACHERS UNION

409A Forces Senior Partner to Leave Law Firm

Attorney decides to leave law firm after four decades to avoid 409A tax trap.

Smith Barney Deferred Comp Program Approved by Court

NJ Court Upholds Contraversial Deferred Stock Program

Smith Barney Brokers We Like

Tax Prof Blog - School Teachers ABC's of 409A

Tax Prof Blog discusses 409A issues relating to school teachers (10 Month Contract with 12 Month Pay).

Another Law Professor Comments

IRS Position

Law Firm Publishes Notes From IRS Meetings on 409A

409A Gossip

"Representatives from the IRS and the Treasury Department have been making rounds in recent weeks to talk about compliance with section 409A of the Internal Revenue Code transitional guidance. The presentations have been conversational in tone and have included deep drilling on technical niceties that make for dense reading. The following notes include information provided by Treasury in May to the AICPA National Conference on Employee Benefit Plans in Las Vegas and the ABA Section of Taxation conference in Washington, D.C."

ABA Comments to IRS Regarding 409A Correction Program

ABA Comment Letter

"Section 409A was enacted in part as a response to the issues identified in the Enron Report; however, section 409A is a broad and complex provision that covers
arrangements that were not the subject of the Enron Report. Inevitably, thousands of taxpayers will violate section 409A through honest errors, and not due to any form of abuse. We believe that the establishment of a permanent correction program would promote the efficient and equitable administration of the tax laws (including voluntary compliance) by permitting self-correction of inadvertent violations of the complex requirements of section 409A. Nothing in the Enron Report or other legislative history precludes such a program."

Black Box Corp Incurs 409A Costs

Earnings Release

"409A expenses
The Company incurred significant costs as a result of measures taken to address the application of Section 409A of the Internal Revenue Code of 1986, as amended, related to its stock options. Management excludes these expenses and their related tax impact for the purpose of calculating non-GAAP financial measures when it evaluates the continuing operational performance of the Company because these costs are generally non-recurring and cannot be changed or influenced by Management."

Sen. Clinton Introduces Bill to Amend 409A

Bill Seeks to Cap Deferred Compensation

The Bill



S.2866
Corporate Executive Compensation Accountability and Transparency Act (Introduced in Senate)

SEC. 2. LIMITATION ON ANNUAL AMOUNTS WHICH MAY BE DEFERRED UNDER NONQUALIFIED DEFERRED COMPENSATION ARRANGEMENTS.

(a) In General- Section 409A(a) of the Internal Revenue Code of 1986 (relating to inclusion of gross income under nonqualified deferred compensation plans) is amended--

(1) by striking `and (4)' in subclause (I) of paragraph (1)(A)(i) and inserting `(4), and (5)', and

(2) by adding at the end the following new paragraph:

`(5) ANNUAL LIMITATION ON AGGREGATE DEFERRED AMOUNTS-

`(A) LIMITATION- The requirements of this paragraph are met if the plan provides that the aggregate amount of compensation which is deferred for any taxable year with respect to a participant under the plan may not exceed the applicable dollar amount for the taxable year.

`(B) INCLUSION OF FUTURE EARNINGS- If an amount is includible under paragraph (1) in the gross income of a participant for any taxable year by reason of any failure to meet the requirements of this paragraph, any income (whether actual or notional) for any subsequent taxable year shall be included in gross income under paragraph (1)(A) in such subsequent taxable year to the extent such income--

`(i) is attributable to compensation (or income attributable to such compensation) required to be included in gross income by reason of such failure (including by reason of this subparagraph), and

`(ii) is not subject to a substantial risk of forfeiture and has not been previously included in gross income.

`(C) AGGREGATION RULES- For purposes of this paragraph, all nonqualified deferred compensation plans maintained by all employers treated as a single employer under subsection (d)(6) shall be treated as 1 plan.

`(D) APPLICABLE DOLLAR AMOUNT- For purposes of this paragraph, the term `applicable dollar amount' means, with respect to any participant, $1,000,000.'.

Marvell Technology Incurs 409A Penalties

Relates to Options Backdating

From the 10-K: "During the fourth quarter of fiscal 2007, the Internal Revenue Service notified our U.S. subsidiaries that fiscal 2004 through 2006 would be audited and would include an audit of Section 409A and payroll tax issues arising out of the stock option investigation. In fiscal 2007, we accrued $24.2 million of Section 409A liabilities for each of the restated years (including interest and penalties), accrued payroll taxes (including interest and penalties), where applicable. We elected to join and completed the IRS program Announcement 2007-18 and its California equivalent. Through the close of fiscal 2008 we paid $21.8 million for Section 409A liabilities under the available programs, including interest and penalties where applicable. During fiscal 2008, based on development of our IRS payroll tax audit, we accrued an additional penalty of $7.2 million related to the conversion of incentive stock options into nonstatutory stock options due to the mispricing of the original option grant."

The 10-K

Director Resigns

Another Director Resigns

Pediatrix Takes Charge Relating to 409A

Pediatrix Reports $6 million Expense Relating to 409A.

Relates to Option Back-Dating

KLA-Tencor Violates 409A; Takes Charge Relating to Backdating; Reimburses Employees for 409A Penalties

KLA-Tencor takes big charge relating to backdating stock options, reimbursing employees for 409A penalty taxes, and related costs.

Press Release (see footnotes)

Stock option backdating; $65 million payout; $400 million in restatements.

Tender Offer to replace bad options

CFO Resigns

Tech Blogger Relentlessly Discusses 409A

Widely-read technology blogger, Brad Feld, has been blogging relentlessly about 409A for years. His blogs provide great insight about how 409A is having a real effect on technology and start-up companies.

His Post About 409A Dismay

409A Humor

Much appreciated 409A humor from Kevin B. Segal.

$50 Million in 409A Additional Taxes Incurred by Lam Research

http://www.bizjournals.com/eastbay/stories/2008/03/31/daily19.html

Lam (NASDAQ: LRCX) expects to record cash expenses for the quarter ended in March of $50 million to $55 million "to assume responsibility for the 409A tax liabilities of employees."

Lam Research 8-K

Lam Research Tender Offer to Optionees

409A and Non-U.S. Arrangements

http://www.mercer.com/referencecontent.jhtml?idContent=1296475

"Although there are lengthy compliance requirements to avoid the tax consequences, a number of potential exemptions are available to non-US plans. These exemptions are quite complex and are discussed in the article."

409A: "Intelligent Design" and Linked Plans

http://www.jpmorgan.com/cm/Satellite?c=JPM_Content_C&cid=1159337371619&pagename=jpmorgan/am/JPM_Content_C/Generic_Detail_Page_Template

Tech CFOs Cite 409A Third on List of Biggest Challenges

http://www.cscpa.org/Content/23081.aspx

"Forty-nine percent of the 100 CFOs surveyed identified Section 404 as the greatest challenge, 36 percent said FIN 48, and 12 percent cited 409A. "

Option Reprice Wave Builds

http://www.financialweek.com/apps/pbcs.dll/article?AID=/20080218/REG/287644456

"With top executives and rank-and-filers at many U.S. companies holding now-worthless stock options, the time seems right for a round of repricing. New rules requiring companies to get the blessing of shareholders, themselves freshly gored by falling stock prices, will force boards to devise friendlier, or at least less objectionable, ways to pitch the controversial practice."


409A not discussed, but see Preamble to final regulations relating to re-pricing options.

IRS Reverses Position on 162(m); Public Companies Confused

http://taxprof.typepad.com/taxprof_blog/2008/02/irs-reverses-co.html

"In earlier rulings, the IRS had treated payments upon an executive's involuntary termination or termination for good cause as coming within the death, disability, or change in control exception. In PLR 200804004 (1/25/2008), the IRS reversed course and ruled that an incentive pay award would not qualify as performance-based compensation exempt from the § 162(m) $1 million cap where the executive is entitled to the payment in the event of an involuntary termination or termination for good reason."

IRS PROVIDES TRANSITION RELIEF (February 21, 2008)

http://www.irs.gov/pub/irs-drop/rr-08-13.pdf

LAW FIRMS FIGHT BACK

http://www.deweyleboeuf.com/files/News/c7df8e65-4b85-47b3-bda4-52470ea3df67/Presentation/NewsAttachment/c1a267bb-2c43-45aa-9265-5368ee28c7c5/6336.pdf

RESULTS FROM THIS?

http://www.law.harvard.edu/programs/olin_center/corporate_governance/MediaMentions/09-05-06_BusinessWeek.pdf

IRS Signals More Intense Scrutiny of Executive Compensation for Tax-Exempt Organizations

http://www.pearlmeyer.com/knowledgecenter/alerts/NewForm990.pdf


"Tax-exempt organizations face significantly expanded disclosure of executive compensation programs and related Board policies in the 2008 tax year under new IRS rules. As a result, potential donors are more likely to review pay programs with greater scrutiny."

Time to end the 'talent tax' in Silicon Valley

http://www.pacificresearch.org/publications/id.1202/pub_detail.asp

"President Bush wants to make the American work force globally competitive, but new government rules may soon push the best and brightest of Silicon Valley out of the country. Unless the U.S. wants to add talented professionals as a new national export, Congress should revoke the tax disaster known as Section 409A."

Has Congress Stopped Executives from Raiding the Bank? A Critical Analysis of I.R.C. §409A

http://papers.ssrn.com/sol3/papers.cfm?abstract_id=1010983

"This paper focuses on how §409A began largely as a reaction to the sizeable distributions to Enron executives from their nonqualified deferred compensation accounts shortly before Enron's collapse. The paper discusses how §409A represents a major shift in nonqualified deferred compensation planning but does little to remedy the exact problem at Enron that gave rise to §409A."

Tax Rules Governing Deferred Compensation, 409A, Focused on the Least Important Policy Considerations and Ignore the Most Important

http://papers.ssrn.com/sol3/papers.cfm?abstract_id=969058

"The tax rules governing deferred compensation, codified at section 409A, are harsh and complex. The rules are focused on the least important policy considerations and overlook the most important. Professors Halperin and Yale suggest a different approach, one that would make the law simpler, fairer, and more effective."

409A Not Affecting Companys' Executive Benefits

http://www.financialweek.com/apps/pbcs.dll/article?AID=/20080121/REG/59070910/1036

The Rising Cost of Complying with the Federal Income Tax

http://www.taxfoundation.org/files/sr138.pdf

Controlling Executive Compensation Through the Tax Code

http://lawdev.wlu.edu/deptimages/Law%20Review/64-3Polsky.pdf

Executive Compensation Reform and the Limits of Tax Policy

http://www.urban.org/publications/311113.html

"But the legislation misses the mark for effective reform. It does little to address the long-standing improper tax subsidy for certain deferred compensation arrangements. Compounding matters, the legislation follows previous misguided efforts to regulate corporate governance through the tax code, almost certainly leaving shareholders worse off for the effort. In short, Congress not only let slip away an opportunity for meaningful tax policy reform, but it also took a large step backward on corporate-governance policy."

Regulation is Blocking Way for US Enterprise

http://search.ft.com/ftArticle?queryText=409A&y=6&aje=true&x=13&id=070604007100&ct=0

"The US has long enjoyed multiple and largely uncongested exit avenues, a big factor in its entrepreneurial vibrancy. Now some in its technology communities fear those avenues are narrowing, perhaps closing."