- Last Chance to Correct for Certain Section 409A Release Timing Document Failures Without Penalty: As reported in our October 3, 2012, Legal Alert, “Transition Relief for Correction of Section 409A Release Agreement Timing Failures Expires on December 31, 2012,” change in control, severance, employment and other deferred compensation agreements that are subject to Section 409A of the Code (“Section 409A”), and require an employee to sign a release to receive payment, should be reviewed for compliance with Section 409A’s release timing rules by December 31, 2012.
In Notice 2010-6, the IRS indicated that, in certain circumstances, since the consideration and revocation period described in a release provision included in a nonqualified deferred compensation agreement could span two years, an employee has the ability to pick the calendar year the payment will be made (by either accelerating or delaying the signing of the release), which violates the requirements of Section 409A. The IRS initially suggested that the “fix” for this problem would be to modify the arrangement to provide that payment would be made on the last day of either a 60- or 90-day period following the employee’s termination of employment. In Notice 2010-80, the IRS offered an additional solution to this issue, namely an amendment to provide that payment will be made in the second taxable year if the period during which the employee may consider and revoke a release spans two calendar years.
Employers that address these release timing failures prior to December 31, 2012 may be able to correct violations of Section 409A’s release timing rules without taxes and penalties and, in some cases, without additional disclosure to the IRS.
- Consider Shareholder Reapproval of Section 162(m) Performance Compensation Plans Approved in 2008: Section 162(m) of the Code limits the deduction a public company may take for compensation payable to “covered employees” to $1,000,000 per year. “Performance-based compensation” that meets the requirements of Section 162(m) is not subject to this limitation. The Section 162(m) regulations require that shareholders reapprove the performance goals with respect to which “performance-based compensation” is paid every five years. This means that companies that obtained shareholder approval of plans containing Section 162(m) performance goals in 2008 must resubmit the plans for shareholder approval in 2013. This is generally done by having the shareholders reapprove a new incentive plan that provides for the award of compensation that complies with Section 162(m).
- Code Section 6039 Information Statements Due by January 31, 2013: Section 6039 of the Code requires companies to file a return and provide a written information statement to each employee or former employee regarding: (1) the transfer of stock pursuant to the exercise of an Incentive Stock Option (“ISO”); and (2) the transfer by the employee or former employee of stock purchased under an Employee Stock Purchase Plan (“ESPP”). Section 6039 applies to stock purchased under an ESPP if the stock was purchased at a permitted discount. For ISO grants and ESPP transfers occurring in 2012, the Section 6039 information statements must be provided no later than January 31, 2013.
- Review Grant Procedures for Upcoming Equity-Based Grants: The stock option backdating scandals were solemn reminders of serious corporate, tax, accounting and legal issues that can be resolved by an employer carefully reviewing its grant practices and procedures. An employer should carefully review its stock plan to determine which entity is charged with making grants under the plan and put in place best practice procedures to ensure the proper entity takes the appropriate action as of the date the awards are considered granted.
- Consider Taking Action to Avoid Higher Taxes in 2013: Effective January 1, 2013, higher earning individuals must pay higher Medicare taxes. Starting in 2013, the HI employee portion of the FICA tax will increase to 2.35% (from its current 1.45%) on wages over $200,000 for individuals and $250,000 for married individuals filing a joint return. In addition, a new 3.8% Medicare contribution tax will be imposed on individuals and families on the lesser of (i) modified adjusted gross income in excess of $200,000 for individuals and $250,000 for married individuals filing a joint return, or (ii) “net investment income” derived from interest, dividends, annuities, royalties, rents, gross income from a trade or business, and net gains from the disposition of property less the deductions allocable to such income. Net investment income does not include distributions from qualified pension, profit sharing and 401(k) plans.
To prepare for the increased Medicare taxes in 2013, higher earning individuals should consider whether it makes sense to accelerate income inclusion to 2012. For example, employees with vested, unexercised stock options and vested restricted stock may consider exercising the options and selling the restricted shares before the end of the year