Code § 409A Nonqualified Deferred Compensation Rules Revisited 
An article titled "Code § 409A Nonqualified Deferred Compensation Rules Revisited" by Charles C. Shulman, Esq., was published in the Journal of Deferred Compensation (Wolters Kluwer) in two parts in the Spring 2024 and Summer 2024 issues. I have reproduced both parts of "Code § 409A Nonqualified Deferred Compensation Rules Revisited" at https://ebeclaw.com/wp-content/uploads/2024/08/409A-Outline-Current-ccs.pdf
Code § 409A, enacted in 2004 imposes strict rules on nonqualified deferred compensation arrangements. The IRS issued final § 409A regulations in 2007 and further proposed § 409A regulations in 2016 and other guidance and rulings from time to time. There have been a number of cases regarding § 409A. The substantial rules and issues relating to the above are basically all discussed in the article.
Part I of the article discusses primarily which plans are subject to Code § 409A, § 409A election, distribution, and other restrictions, application to severance arrangements and employment agreements and related issues. Part II of the article discusses primarily the application of IRC § 409A to equity awards, SERPs and bonus plans, 20% tax, corrections for failures, foreign trust and related matters.
Both parts of the article can be accessed at https://ebeclaw.com/wp-content/uploads/2024/08/409A-Outline-Current-ccs.pdf
Below is the table of contents:
Code § 409A Nonqualified Deferred Compensation Rules Revisited
https://ebeclaw.com/wp-content/uploads/2024/08/409A-Outline-Current-ccs.pdf
Table of Contents
PART I OF ARTICLE
A. Which Plans are Subject to § 409A
Restrictions on Deferred Compensation
Definition of NQDC Plan
Definition of Plan
Exception for Qualified Plans
Exception for Certain Welfare Plan Benefits
Exception for § 457(b) Eligible Plans but Not for § 457(f) Ineligible Plans
Exceptions for Amounts Immediately Taxable & Nontaxable Medical Arrangements
Exception for Qualified Equity Grant Deferrals under § 83(i)
Application to Employees and Other Service Providers
Exception for Foreign Arrangements
Plan Aggregation and Types of Plans
Deferral of Compensation to Which Service Provider has a Legally Binding Right
Not Applicable to Discretionary Plans
2 ½-Month Short-Term Deferral Exception
Recurring Part-Year Compensation Such as School Teachers' Compensation
Substantial Risk of Forfeiture
Section 457A – Taxation of Deferred Compensation of Nonqualified Entities
B. Section 409A Election, Distribution and Other Restrictions
Initial Election – Prior to Year Services Performed or Within 30 Days of Becoming Eligible
13-Month Rule
Elections for Recurring Part Year Compensation
Performance-Based Compensation Elections Six Months Prior to End of Period
Subsequent Elections – 12-Month Delay and Five-Year Deferral
Separate Payments regarding Subsequent Changes in Time or Form of Payment
Stacking
When Payment is made for Purposes of § 409A
Multiple Payment Events
Different Life Annuities Treated as Single Form of Payment
Permissible Distribution Events
Permissible Distribution Event – (i) Specified Date or Fixed Schedule
Permissible Distribution Event – (ii) Separation from Service
Permissible Distribution Event – (iii) Disability
Permissible Distribution Event – (iv) Death
Permissible Distribution Event – (v) Change in Control
Permissible Distribution Event – (vi) Severe Financial Hardship
Anti-Toggling Restriction – Single Payment Form Required for Each Payment Event…
Designated Payment Dates Within One Calendar Year, 90 Day Payment Period, etc.
6-Month Waiting Period after Separation from Service for Specified Employees (Top 50) of
Public Companies
Multiple Buckets of Deferrals with Different Payout Years
Expense Reimbursements Within the Year Following the Year of the Expense, In-Kind Benefits
Medical Reimbursements and § 105(h)
Tax Gross-Ups
Delay in Payment by Employee to Comply with Other Laws
Disputed Payments and Refusals to Pay
Written Plan Requirement
Plan Amendments
Prohibition on Acceleration of Payment
Acceleration of Vesting Permitted by Regulations
Acceleration of Payments Permitted for Domestic Relations Order, for De Minimis Payments of
Entire Interest, for Unforeseeable Emergencies, Etc.
Acceleration Permitted on Plan Termination following a Change in Control, in Bankruptcy or
Where All Such Plans are Terminated
Certain Offsets Permitted
Substitutions Replacing Arrangements Subject to § 409A and Forfeitures
Back-to-Back Deferred Compensation Arrangements (e.g., for Hedge Fund Managers)
Savings Clauses Disregarded
Typical Boilerplate Provisions Regarding § 409A
C. Application to Severance Arrangements and Employment Agreements
Severance Plans at Discretion of Employer Excluded Since There is No Legally Binding Right
Exception if Payout on Involuntary Termination or Within 2 ½ Months After Year of Termination
Test for When Quit for Good Reason is Considered Involuntary Separation
Safe Harbor Good Reason
Severance Conditioned on Executing Release of Claims
Treatment of Involuntary Severance Plan as a Separate Plan
Exception for Involuntary Severance or Early Retirement Program if Separation Pay Does Not
Exceed 2 x Lesser of Pay or § 401(a)(17) Amount and Paid by Second Year Following Separation
Exception from § 409A for Reimbursement for Expenses, In-Kind Benefits and other Fringe Benefits
following Termination of Employment
Limited Payment Small-Sum Cashout Exception
Stacking of Exemptions
Indemnification and Legal Settlements
Consequences of Applicability of § 409A to Severance Arrangements
Clawback Recovery Issues under Code § 409A
Employment Agreement Provisions Regarding § 409A
PART II OF ARTICLE
D. Options, SARs, Restricted Stock, RSUs and Partnership Interests
Non-Applicability of § 409A to Fair-Market-Value Options and SARs Without Deferral Feature
Service Recipient Stock or Stock of an Affiliate
Includes Certain Prospective Employees
Repurchases for Less than Fair Market Value
Determination of Fair Market Value
Dividend Equivalents for Options or SARs
Exemption for ISOs and 423 Options
Modification by Reduction in Exercise Price Treated as New Option
Extension Allowed Only if Not Extended Beyond Earlier of Original Term or 10 Years from Grant
Consequences of Stock Options or SARs Being Subject to § 409A
Potential Solution Where Options or SARs are Subject to § 409A
Restricted Stock Not Subject to § 409A
RSUs Subject to § 409A if Shares Not Delivered at (or Within Short-Term Period After) Vesting
Consequences of RSUs Being Subject to § 409A
Partnership Interests
E. Application to SERPs
Changes in SERP Benefits Resulting from Changes in Qualified Plan Benefits Permissible
Changes in 401(k) Elections Affecting SERPs
More About Deferral Elections and SERPs
Cannot Use Qualified Plan Forms of Distribution for SERP
Distribution Forms Under SERP
F. Application to Bonus Plans
Discretionary Bonus Plans vs. Legally Binding Bonus Plans
Short-Term Deferrals or Employment on Last Day of Year Requirement
Bonuses Payable upon Quitting for Good Reasons
Consequences of a Bonus Plan Becoming Subject to § 409A
G. Immediate Taxation, Additional 20% Tax & Interest; Information Reporting
Immediate Taxation, 20% Additional Tax, and Interest on Underpayment
Tax on Amounts Deferred in Prior Years
Additional State Tax
Medicare Not Applicable to § 409A
Amounts Includible in Income and Additional 20% Tax; Anti-Abuse Rules; Taxed Only for Years
of Failure; Opportunity to Correct Prior to Year of Vesting, Etc.
Information Reporting and Withholding for Deferred Compensation Plans Under §409A
Currently No Withholding Obligation for 20% Additional Tax or Premium Tax
No Ruling Position
Indemnification for § 409A Violations
H. Correction For § 409A Operational and Documentary Failures
IRS Audits
Notice 2008-113 – Operational Failure Corrections
Correcting Documentary Errors Prior to Year of Vesting
Notice 2010-6 – Voluntary Corrections for § 409A Documentary Failures
I. Grandfather Rule and Material Modifications
General Grandfather Rule – Earned and Vested by 12/31/2004
Lose Grandfathering if Material Modification After 10/3/2004
Q&A 19(c) Elections and Grandfathering
Grandfathered Discounted Stock Options and SARs and Modification
When to Maintain Grandfathering
Change in Payment Elections or Conditions by 12/31/2008
Transition Relief for Linked Plan Elections by 12/31/2008
Substitutions of Discounted Options with Non-discounted Options Prior to 2009
J. Restrictions on Foreign or Springing Rabbi Trusts
Offshore Rabbi Trusts
Financial Health Triggers
Income Inclusion for Offshore Trusts and Financial Health Triggers
Effective Date
Restriction on Funding if Severely Underfunded or Terminating Defined Benefit Plan
https://ebeclaw.com/wp-content/uploads/2024/08/409A-Outline-Current-ccs.pdf
No comments:
Post a Comment
Note: Only a member of this blog may post a comment.