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