YEAR-END DEADLINE FOR AMENDING SECTION 409A ARRANGEMENTS IS RAPIDLY APPROACHING
The deadline for amending deferred compensation arrangements under Internal Revenue Code Section 409A (“Section 409A”) is rapidly approaching. The transitional rules that have governed deferred compensation arrangements subject to Section 409A since 2004 (as discussed in our October 2005, November 2006, September 2007, and December 2007 newsletters on Section 409A) expire at the end of this year. Therefore, on or before December 31, 2008, all nonqualified deferred compensation arrangements must be reviewed and likely amended or documented to either comply with or meet an exemption from, Section 409A.
The looming December 31, 2008, deadline is critical because the failure to comply with Section 409A can trigger harsh tax penalties on an individual. Failure to satisfy Section 409A will result in immediate taxation on the deferred compensation, in addition to interest on the underpayment and a 20% penalty tax, and noncompliance with Section 409A may subject the individual’s other deferred compensation arrangements to the severe tax consequences as well, even if the other arrangements comply with Section 409A. Furthermore, an employer paying deferred compensation may be subject to penalties if it fails to properly withhold taxes or report the income.
Accordingly, we are continuing to advise clients to create a thorough inventory of their compensatory arrangements, if they have not already done so, to identify arrangements that must be reviewed to determine whether they need to be amended or documented to comply with, or meet an exemption from, Section 409A. Any compensatory arrangement that is payable in a later year may be subject to Section 409A.
In addition to traditional deferred compensation plans, Section 409A may implicate the following arrangements:
- Supplemental retirement plans (e.g., SERPS)
- Excess benefit plans
- Severance plans and agreements
- Employment agreements and offer letters
- Consulting agreements
- Change-in-control agreements
- Bonus programs
- Long-term incentive plans
- Director deferred fee arrangements
- Salary continuation arrangements
- Discounted stock options and discounted SARs
- Phantom stock and phantom stock units
- Restricted stock units
- Performance awards
- Certain split dollar arrangements
- Employer-paid medical coverage
- Medical coverage beyond the COBRA period
- Reimbursement arrangements
- Tax gross-ups
In anticipation of the year-end deadline, we have contacted most clients that we advise regularly on benefit and compensation matters regarding Section 409A compliance. If we have not contacted you thus far, we may not anticipate that you would like our assistance regarding Section 409A matters. However, we certainly are available to assist with Section 409A compliance. To ensure that we are able to timely review and prepare any necessary amendments or documents and that you have sufficient time to obtain any necessary consents and/or board or committee approvals, we ask that you contact us as soon as possible if you would like our assistance with reviewing compensatory arrangements and drafting any necessary Section 409A documents.
No representation is made that the quality of legal services to be performed is greater than the quality of legal services performed by other lawyers.
Disclaimer regarding legal advice – The information in this newsletter should not be construed as legal advice. This information is not intended to create or constitute an attorney-client relationship. For more information or an explanation about the matters discussed in this newsletter, please contact an attorney in this practice group.
IRS Circular 230 Disclosure – To ensure compliance with requirements imposed by the IRS, we inform you that any U.S. federal tax advice contained in this communication is not intended or written to be used, and cannot be used, for the purpose of (i) avoiding penalties under the Internal Revenue Code or (ii) promoting, marketing or recommending to another party any transaction or matter addressed herein.