By year-end 2007, all employers are required to amend their deferred compensation plans and agreements to comply with new IRS rules under Section 409A of the Code. To avoid “hidden traps” in these rules, please note the following:
What employers are subject to the new rules?
All employers, whether they are small or large employers, and whether they are publicly traded or private companies. These rules apply to both common law employees and certain independent contractors.
What arrangements are potentially subject to the new rules?
Any agreements which pay “deferred compensation,” which is an amount an individual earns during year one (i.e., it’s “vested”) but does not receive until later than two and a half months after the end of the year. These arrangements include:
- Employment contracts;
- Bonus plans;
- Severance plans or severance agreements;
- Change of control agreements;
- Stock options that are misdated, where the valuation of the stock has not been properly documented (often a problem with early stage private companies), or where the option permits an additional deferral of income upon exercise;
- All non-qualified deferred compensation plans, such as SERPs (supplemental retirement plans), top hat plans and director compensation plans; and
- Stock appreciation rights (SARs), restricted stock units and phantom stock.
What terms of these agreements might have to be changed this year?
For monies that may be paid in the future (unless the benefit was vested on December 31, 2004), the agreements must provide fixed payment dates established in advance, and there must be no provision allowing an acceleration of payment. However, amounts can be accelerated and paid upon “disability” or a “change in control” of the company. Each of these terms must be defined as specified in the new law. more...