 |
||
|
Employment contracts, bonus plans, deferred compensation plans, long-term incentive plans, director deferred fee agreements, change in control agreements, supplemental executive retirement plans, severance plans, consulting agreements, split-dollar life insurance, stock option plans and other arrangements under which an employee or other service provider is deemed to have a deferral of taxable income, should be promptly reviewed for compliance with Internal Revenue Code Section 409A. This advice pertains even if the arrangement was previously reviewed and amended for compliance prior to issuance of the final Treasury Regulations under Section 409A on April 10, 2007. Previous amendments, while appropriately adopted to satisfy the “good faith” compliance requirements under then existing IRS guidance may not contain provisions necessitated by the final regulations. Affected arrangements must be amended by December 31, 2008.
With limited exceptions (e.g., qualified retirement plans), Section 409A covers arrangements that provide for the deferral of compensation. In general, deferral involves delaying the receipt of payment until a tax reporting period later than the one in which compensation was earned. Virtually any type of compensation arrangement, including one embodied in an ordinary employment contract, may be subject to the stringent requirements and potentially punitive sanctions of Section 409A. If the arrangement fails to comply, the compensation will be presently includible in income (whether or not it has been paid) and will be subject to an additional excise tax of 20 percent, plus interest on the amount involved from the date the arrangement first failed to comply with the statute.
Section 409A prescribes specific time frames for making elections to defer income and provides that both the time and form of payment must be specified at the time of the deferral or be stated in the governing plan document. The arrangement cannot provide for distributions prior to the earliest of (i) employment termination; (ii) disability; (iii) death; (iv) a change in control of the entity; (v) occurrence of an unforeseeable emergency; or (vi) a specified date (or pursuant to a fixed schedule set forth in the plan). With limited exceptions (e.g., to the extent required by a domestic relations order), any acceleration of payments is prohibited.
A plan may permit an election subsequent to the initial deferral election either delaying the time of payment or changing the form of payment, but only if (i) in the event of a scheduled payment, the new election is made at least 12 months before the date the payment was scheduled to have been made; (ii) the new election is not effective for at least 12 months after it is made; and (iii) the election delays payment for at least 5 years from the date the payment would otherwise have been made. Under the transition relief made available through this year by the IRS, participants may change their payment elections without regard to the foregoing rules, within certain limits. For example, a participant may not elect this year to defer into a later year a payment that would otherwise be made in 2008 and may not elect to accelerate into 2008 a payment that would otherwise be made in a subsequent year.
Section 409A substantially alters the tax treatment of many types of established compensation arrangements between organizations and their employees, as well as their independent contractors and outside directors. The statute applies to business entities, whether privately held or publicly traded, as well as to tax-exempt organizations and governmental units. Organizations should immediately conduct an inventory of all potentially affected arrangements and have them reviewed relative to the impact of Section 409A. The amendment process can be time-consuming, as it may involve obtaining participant consents, board approvals and in some cases, filings with the Securities Exchange Commission. As such, immediate action should be taken to avoid significant adverse tax consequences, including substantial penalties. Our tax and benefits personnel are prepared to assist organizations with arrangements affected by Section 409.
Attorneys | Practice Groups | Seminars & Events Headlines | Publications | Careers | Contact SW ©MMIX Shumaker Williams P.C. |