Wednesday, October 7, 2009
Monday, October 5, 2009
IRS Says it Will Guide on 457A
Will provide guidance and issue private rulings on 457A.
"The IRS is planning to issue guidance on a number of issues involving Code Sec. 457 deferred compensation plans, officials from Treasury and the IRS indicated. In the meantime, the IRS is issuing private letter rulings and responses to congressional inquiries on hardship issues, grandfathered plans and other concerns, Cheryl Press, a senior attorney with the IRS Associate Chief Counsel (Tax Exempt and Government Entities), stated."
"The IRS is planning to issue guidance on a number of issues involving Code Sec. 457 deferred compensation plans, officials from Treasury and the IRS indicated. In the meantime, the IRS is issuing private letter rulings and responses to congressional inquiries on hardship issues, grandfathered plans and other concerns, Cheryl Press, a senior attorney with the IRS Associate Chief Counsel (Tax Exempt and Government Entities), stated."
Thursday, September 17, 2009
IRS Says Salary Advances May Cause 409A Issue
Hat Tip from Stanley D. Baum - Article Here
"The IRS said that the doctrine of constructive receipt applies to the "salary advances" to employees. Accordingly, an employee would be required to include the amount available as a salary advance in gross income in the earliest open tax year in which the advance was available (even if not taken), and this amount would be subject to income tax withholding at such time as a constructive payment. The IRS continued by saying that, even if there was no constructive receipt, salary advances which an employee is expected to earn through future services are taxed as compensation, and are therefore included in gross income, at the time of receipt. The IRS conceded that an (unspecified) employment tax exception would apply to an employee, so that any advance would not be subject to employment tax. Further, if there is no constructive receipt, the salary advance program causes the Plan to violate IRC Section 409A, due to the permitted off-set feature described above. Apparently, the IRS felt that this offset, which is a pre-employment termination use of amounts deferred under the Plan, causes an acceleration of the payment of deferred compensation by the Plan, and this acceleration violates Section 409A."
IRS Memo
"The IRS said that the doctrine of constructive receipt applies to the "salary advances" to employees. Accordingly, an employee would be required to include the amount available as a salary advance in gross income in the earliest open tax year in which the advance was available (even if not taken), and this amount would be subject to income tax withholding at such time as a constructive payment. The IRS continued by saying that, even if there was no constructive receipt, salary advances which an employee is expected to earn through future services are taxed as compensation, and are therefore included in gross income, at the time of receipt. The IRS conceded that an (unspecified) employment tax exception would apply to an employee, so that any advance would not be subject to employment tax. Further, if there is no constructive receipt, the salary advance program causes the Plan to violate IRC Section 409A, due to the permitted off-set feature described above. Apparently, the IRS felt that this offset, which is a pre-employment termination use of amounts deferred under the Plan, causes an acceleration of the payment of deferred compensation by the Plan, and this acceleration violates Section 409A."
IRS Memo
Friday, August 21, 2009
Correcting 409A Failures
Interesting/Contraversial Article Regarding Correcting Failures and Mistakes
"In Part Two, we explore how to correct failures
when the notice’s program is unavailable. We suspect
these will be legion. The IRS might not think that
correction outside the notice is permitted. If this is
their view, we do not agree. The IRS’s narrow view
appears based on the notice’s underlying and, we
believe, mistaken theory of section 409A. We set forth
a better view of section 409A, one more consistent
with the statute and regulations, and based on traditional
concepts of income receipt. On the basis of this
preferred view, we explore how 409A operational
failures might be corrected using rescission doctrine,
the longstanding rule of Couch v. Commissioner, and
other theories of income receipt derived from the case
law. The difference between these two opposing theories
of section 409A will underlie this and no doubt
other disputes about section 409A compliance and
administration for years to come."
"In Part Two, we explore how to correct failures
when the notice’s program is unavailable. We suspect
these will be legion. The IRS might not think that
correction outside the notice is permitted. If this is
their view, we do not agree. The IRS’s narrow view
appears based on the notice’s underlying and, we
believe, mistaken theory of section 409A. We set forth
a better view of section 409A, one more consistent
with the statute and regulations, and based on traditional
concepts of income receipt. On the basis of this
preferred view, we explore how 409A operational
failures might be corrected using rescission doctrine,
the longstanding rule of Couch v. Commissioner, and
other theories of income receipt derived from the case
law. The difference between these two opposing theories
of section 409A will underlie this and no doubt
other disputes about section 409A compliance and
administration for years to come."
Tuesday, August 18, 2009
Supreme Court Will Hear Case on Executive Pay
"The Supreme Court will hear the case this fall, as anger over huge bonuses paid to the executives of failing companies continues to grow. The case, Jones v. Harris Associates, may turn out to be the court’s first significant statement on the corporate culture that helped lead to the Great Recession."
Link
Link
Monday, August 17, 2009
"Ignorning 409A" Chosen Top "Classic and Costly" Mistake for Start-ups
"The introduction of this element of 409A has dramatically changed the practices of private start up company boards who historically had priced options using their business judgment and some simple rules of thumb based on discounts from the most recent preferred stock price."
LINK
LINK
Monday, July 27, 2009
Backdating Returns to Spotlight; IRS GC Memorandum
Link from CFO Magazine
"The IRS legal memorandum, AM 2009-006, released on July 6, 2009, addresses the issue of whether the compensation emanating from these discounted options constitutes "qualified performance based compensation." The answer is an unequivocal no...
Whether a stock option satisfies the requirements of Regulation Section 1.162-27(e)(2)(vi)(A) is determined as of the date of grant of the option. The regulations do not provide a mechanism to retroactively reprice an option to transform compensation resulting from the exercise of the option into performance based compensation. Because the compensation arising from the option grants in this case was not based solely on an increase in the price of the stock after the grant date, none of the compensation attributable to the options in question was qualified performance based compensation."
Link to IRS GC Memo
"The IRS legal memorandum, AM 2009-006, released on July 6, 2009, addresses the issue of whether the compensation emanating from these discounted options constitutes "qualified performance based compensation." The answer is an unequivocal no...
Whether a stock option satisfies the requirements of Regulation Section 1.162-27(e)(2)(vi)(A) is determined as of the date of grant of the option. The regulations do not provide a mechanism to retroactively reprice an option to transform compensation resulting from the exercise of the option into performance based compensation. Because the compensation arising from the option grants in this case was not based solely on an increase in the price of the stock after the grant date, none of the compensation attributable to the options in question was qualified performance based compensation."
Link to IRS GC Memo
Wednesday, July 15, 2009
Is it Still Possible to Fix Unvested Arrangements?
Article suggests that it is not too late to fix arrangements if they are not yet vested.
Link From ComplianceWeek
"In most cases, an employer with a plan document failure can only report the violation, fix the problem so that it doesn’t affect any future deferrals, and possibly make a tax gross-up payment to an employee who gets hit with the tax, penalty, and interest for a violation. However, the authors note that employers may have a limited opportunity to correct errors for certain types of non-compliant plans that impose vesting conditions, such as severance arrangements."
Link From ComplianceWeek
"In most cases, an employer with a plan document failure can only report the violation, fix the problem so that it doesn’t affect any future deferrals, and possibly make a tax gross-up payment to an employee who gets hit with the tax, penalty, and interest for a violation. However, the authors note that employers may have a limited opportunity to correct errors for certain types of non-compliant plans that impose vesting conditions, such as severance arrangements."
Wednesday, July 1, 2009
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."
"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."
Friday, June 19, 2009
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."
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."
Friday, June 5, 2009
Friday, May 29, 2009
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."
"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."
Wednesday, May 27, 2009
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.”
"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.”
Thursday, May 21, 2009
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."
"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."
Friday, May 1, 2009
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."
"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."
Monday, April 20, 2009
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."
"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."
Thursday, April 16, 2009
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."
"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."
Friday, April 10, 2009
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."
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."
Friday, April 3, 2009
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."
"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."
Thursday, April 2, 2009
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?
Do NFL Signing Bonuses Carry a Substantial Risk of Forfeiture within the Meaning of Section 83 of the Internal Revenue Code?
Tuesday, March 31, 2009
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."
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."
Friday, March 20, 2009
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."
"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."
Tuesday, March 10, 2009
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