- Check Those Employment Agreements - Section 409A Documentation Compliance Deadline Just Five Months Away!
- August 15, 2008
- Law Firm: Parker Poe Adams & Bernstein LLP - Charlotte Office
Section 409A, which was added to the Internal Revenue Code nearly four years ago, imposes potentially severe tax consequences on amounts fitting within the definition of “deferred compensation” that do not comply with its requirements. Since then, the Treasury Department and the Internal Revenue Service have released Section 409A guidance, including extensive final regulations issued in April 2007 (for prior EmployNews articles on the final regulations). Deferred compensation arrangements have been required to operate in good-faith compliance with issued guidance for some time. However, the deadline for properly documenting such arrangements for compliance with Section 409A, which may include properly documenting to qualify for an exemption from Section 409A, is December 31, 2008.
Most employers that sponsor traditional nonqualified deferred compensation arrangements, including supplemental executive retirement, “mirror” 401(k) and long-term incentive plans, are aware of the Section 409A requirements and have taken steps to comply in operation and to amend plan documents in order to be in compliance. However, many employers may be overlooking other documents providing for deferred compensation, within the meaning of Section 409A, that also will need to be amended by the end of 2008. The primary example is an employment agreement containing terms relating to bonuses, “executive” benefits and/or tax gross-up payments, any or all of which may fit within the “deferred compensation” definition. Further, employment agreements, as well as a severance or change-in-control agreements, typically contains provisions for post-employment payments and in-kind benefits, all of which may constitute deferred compensation. As a result, all such agreements should be reviewed and may need to be amended to comply with Section 409A or possibly redesigned to satisfy a “short-term deferral” or “separation pay” exemption. Just a few examples of provisions in such agreements that may be out of compliance include:
- Severance payments for certain voluntary terminations, in excess of certain amounts, or paid out over extended periods.
- Reimbursements for certain taxable fringe benefits, such as employer-provided automobiles, country club memberships or sporting event season tickets, without express limits on timing of reimbursements, and rights to liquidate or exchange such benefits.
- Tax gross-up payments, such as for taxes incurred by executives due to “golden parachute” payments, without express limits on timing of such payments.
All employers that have not yet done so should pull out all employment agreements (including offer letters), severance agreements and change-in-control agreements and have them reviewed for Section 409A compliance as soon as possible. The December 31, 2008 deadline is fast approaching, and potential compliance changes to such agreements may require input from employees as well as the advice of legal counsel.