On February 4, 2009, the U.S. Treasury Department published new guidelines restricting executive compensation at financial institutions that receive governmental money. The new Treasury guidelines indicate that they are designed to ensure that public funds are directed toward the public’s interest in stabilizing our economy, and to ensure that compensation of top executives in the financial community is aligned with the interests of both shareholders and taxpayers.

The guidelines are arranged into three broad topics: (1) compliance and certification; (2) limits on executive compensation, and (3) long-term regulatory reform. With respect to the compliance and certification requirements, the guidelines greatly expand the reporting requirements relating to executive compensation beyond that with which companies must currently comply. In addition, the guidelines directly limit the amount of executive compensation that can be paid. The guidelines further indicate that Treasury will hold a conference on executive pay reform for financial institutions generally.

Although these guidelines are limited in application to financial institutions receiving government money, it is likely that some of these restrictions will eventually apply to other institutions. Specifically, the long-term regulatory reform section of the guidelines indicates that it is not too early to begin examining how compensation strategies have encouraged excessive risk-taking and suggests that all companies should begin developing model compensation policies for the future. The guidelines go on to provide specific steps that should be taken. Additional provisions limiting executive bonuses have been included in various versions of the stimulus legislation. As executive pay matters continue to evolve, look for additional updates from Wildman Harrold.

2009 Retirement Plan Limits

The IRS has increased many of the qualified retirement plan limits for 2009, including increasing the limit on employee elective deferrals and increasing the amount of an employee's compensation that can be considered when providing retirement benefits. Below is a list of the various retirement plan limits applicable for 2009.

  • The limitation on the exclusion for elective deferrals is increased from $15,500 to $16,500 for elective deferrals to Section 401(k) plans and to the federal government’s Thrift Savings Plan, among other plans.
  • The limitation on the annual benefit that may be provided under a defined benefit plan is increased from $185,000 to $195,000.
  • The annual limitation for total contributions to defined contribution plans is increased from $46,000 to $49,000.
  • The annual compensation limit that may be considered for determining benefits is increased from $230,000 to $245,000.
  • The dollar limitation concerning the definition of key employee in a top-heavy plan is increased from $150,000 to $160,000.
  • The dollar amount for determining the maximum account balance in an employee stock ownership plan subject to a 5 year distribution period is increased from $935,000 to $985,000, while the dollar amount used to determine the lengthening of the 5 year distribution period is increased from $185,000 to $195,000.
  • The limitation used in the definition of highly compensated employee is increased from $105,000 to $110,000.
  • The dollar limitation for catch-up contributions to an applicable employer plan (other than a SIMPLE plan or SIMPLE IRA) for individuals aged 50 or over is increased from $5,000 to $5,500; the dollar limitation for catch-up contributions to a SIMPLE plan or SIMPLE IRA remains unchanged at $2,500.
  • The annual compensation limitation for eligible participants in certain governmental plans that, under the plan as in effect on July 1, 1993, allowed cost of living adjustments to the compensation limitation under the plan to be taken into account, is increased from $345,000 to $360,000.
  • The compensation limit for excluding employees from employer contributions under a simplified employee pensions (SEPs) is increased from $500 to $550.
  • The salary reduction limitation under SIMPLE retirement accounts is increased from $10,500 to $11,500.
  • The limitation on deferrals under deferred compensation plans of state and local governments and tax-exempt organizations is increased from $15,500 to $16,500.  

401(k) Automatic Enrollment

The DOL and IRS recently issued a new publication intended to help small businesses better understand the 401(k) automatic enrollment rules, entitled “Automatic Enrollment 401(k) Plans for Small Businesses.” If you are considering establishing an automatic enrollment 401(k) plan, this publication is a valuable resource. It provides a good description of the steps necessary to establish such a plan; it also includes a checklist of items that plan sponsors should consider. If you already have an automatic enrollment 401(k) plan, this publication still can be useful in that it provides additional guidance on how to operate such a plan. It also provides general guidance on how to terminate an automatic enrollment 401(k) plan. You can obtain a copy of the publication from the DOL's Employee Benefits Security Administration (EBSA) by calling 1-866-444-EBSA (3272) or by looking under the “Publications/Reports” section of the EBSA website: www.dol.gov/ebsa. You can also obtain a copy of the publication by calling the IRS at 1-800-TAX-FORM (1-800-829-3676) and requesting IRS Publication 4674.