New Section 409A Deferred Compensation Rules Are Extensive
November 8, 2005
The IRS has recently issued extensive regulations under Section 409A of the Internal Revenue Code. These new rules will have a pervasive and often unexpected impact on how companies compensate their employees, directors and other service providers. If any of the situations listed below apply to your company, learning more about these new rules will help you understand if you may need to act before some of the transitional rules expire on December 31, 2005. Plan amendment relief is available through December 31, 2006, so that plans may be retroactively cured as of January 1, 2005. However, relief from the new rules through termination of an existing plan must be done by December 31, 2005 to be effective.
• Has your company issued options to any service provider where the exercise price is less than the fair market value of the company’s stock?
• Has your company issued fair market value options without an appraisal or fairness opinion to support the valuation of the company’s stock?
• Do you have any pre-October 3, 2004, deferred compensation, phantom stock, stock appreciation rights agreements, or plans with one or more service providers?
• Do you have any piggy-back plans or arrangements, where the payout elections under an ERISA tax qualified plan also control the payout under a non-qualified deferred compensation plan?
• Has any service provider been issued restricted stock or other deferred compensation that is not yet payable, but is no longer subject to a risk of forfeiture?
• Have you made any material change to a non-qualified deferred compensation arrangement or plan on or after October 3, 2004?
• Do you have any severance agreements where all or part of the payment is due more than 2-1/2 months after termination and the benefit is not forfeitable?
• Do you have any retirement plans where the executive can accelerate payment of benefits by agreeing to take a reduced amount (so-called “haircut provisions”) or plans where payments may be accelerated for unexpected emergencies or disability?
• Do you have any rabbi trusts or other funding mechanisms for deferred compensation arrangements where the assets are held outside the United States?
• Are you a public company where key employees are not subject to a six-month delay in payments under all non-qualified plans or agreements?
For more information, contact your regular Holland & Knight attorney.
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