Presenting a live 90-minute webinar with interactive Q&A 409A Guidance on Nonqualified Deferred Compensation Plans: Compliance Strategies Implications of Tax Reform, Definition of Payment, Exemptions, Permitted Payments, Remedies and More WEDNESDAY, MARCH 7, 2018 1pm Eastern | 12pm Central | 11am Mountain | 10am Pacific Today’s faculty features: Marshall Mort, Esq., Fenwick & West , Mountain View, Calif. Hans Andersson, Fenwick & West , Seattle The audio portion of the conference may be accessed via the telephone or by using your computer's speakers. Please refer to the instructions emailed to registrants for additional information. If you have any questions, please contact Customer Service at 1-800-926-7926 ext. 1 .
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New 409A Guidance On Nonqualified Deferred Compensation Plans: Compliance Strategies for Employee Benefits Counsel March 7, 2018
Proposed Section 409A Regulations • Issued June 21, 2016 • Comment period expires September 20, 2016 • Taxpayers may rely on proposed regulations until final regulations are published • Intended to the clarify current final regulations • Generally, not expected to require amendments to current employer plans 6
Agenda • Section 409A Background • Clarifications in the Proposed Regulations to: – Exemptions – Compliant Payments – Corrections Program • Other Clarifications • Questions? 7
Background 8
What is Section 409A? Section 409A is intended as a way to regulate deferred compensation arrangements. – What is “ deferred compensation ”? • A legally binding right – a promise – oral or written • To pay compensation – cash, equity, benefits of many kinds • To a current, former or future employee, director or consultant • Such compensation is not guaranteed to be paid on or before March 15 of the following year Section 409A was enacted, in part, in response to the practice of Enron executives accelerating the payments under their deferred compensation plans in order to access the money before Enron’s bankruptcy, and also in part in response to a history of perceived tax-timing abuse. 9
What is Section 409A? Examples of “ deferred compensation ” Severance arrangements Change of control benefits – earn-out payments, 280G gross-ups Bonuses – performance, signing, retention, change of control Certain stock rights – discounted options, RSUs, guaranteed return awards Director compensation – fee deferrals, perquisites Salary deferrals Certain reimbursements Uncapped vacation accruals “Top - hat” deferred compensation plans and supplemental executive retirement plans (“SERPs”) Each of these is a current legally binding right with compensation potentially to be paid in a later taxable year Section 409A imposes penalties on “nonqualified deferred compensation plans” that are not (i) “ exempt ” from or (ii) “ compliant ” with Section 409A. 10
Summary of 409A Rules Must Comply and Pay On: Exemption: Short-Term Deferral (on or before 15 th If NDCP is not 1. Fixed Date or Fixed Schedule day of third month of year exempt, then it must after vesting) from a vesting event comply with 409A. 2. CIC 3. Separation from Service Exemption: Exempt Stock 4. Disability Rights or Stock Awards 5. Death (options, RSUs that settle 6. Unforeseen Emergency shortly after vesting, restricted stock) Note: 6 month delay for specified employees upon separation from Exemption: Separation Pay service. Plan (a.k.a. “2x2”) Exemption: Qualified Watch “Good Reason” Plans (i.e. 401k Plans) Note : Watch for “toggling” within definition the same payment event, except Watch for walkaway rights upon a separation from service following a CIC. 11
What is Section 409A? • Penalties for non-compliance: – All current and prior year “deferred compensation” of the same kind (even properly deferred amounts) may become immediately taxable if vested • Federal, state and employment taxes – Additional 20% federal tax penalty – Federal interest on tax not paid at underpayment rate + 1% – California imposes an additional 5% tax penalty plus interest • Companies must withhold the ordinary income and employment taxes – No withholding obligation for the 20% penalty tax • Companies must report failed deferrals and “409A income” on W -2 and possibly amend prior years’ W -2s – Penalties to company for failure to timely withhold and report 12
Proposed Regulations: Clarifications to Exemptions 13
Extension of Short-Term Deferral Rule • Current regulations: – A payment which must be made within 2 ½ months following the year in which the payment vests is generally exempt from 409A requirements (“ short-term deferral ”) – Payment may continue to qualify as a short-term deferral even if made outside the 2 ½ month period if: • It is administratively impracticable for the company to make the payment by the end of the 2 ½ month period • Making the payment would jeopardize the company’s ability to continue as a going concern • Making the payment would result in lost Section 162(m) deduction if deduction was not reasonably foreseeable at the time the legally binding right arose 14
Extension of Short-Term Deferral Rule • Proposed regulations: – Payment may continue to qualify as a short-term deferral even if made outside the 2 ½ month period if the payment would violate federal securities laws or other applicable law. – Payment must be made as soon as reasonably practicable following the first date on which the company anticipates or reasonably should anticipate that making the payment would not cause a violation • Potential application – Financial restatement that results in ineffective S-8 because public filings are no longer current 15
Awards with Repurchase Rights for Bad Behavior • Current regulations: – Stock options and SARs (“stock rights”) granted with respect to “service recipient stock” may be exempt from 409A if certain conditions are met – “Service recipient stock” does not include stock that is subject to a repurchase or call right for a repurchase price less than the fair market value of such stock. • Proposed regulations: – Clarify that the definition of “service recipient stock” permits repurchases at less than fair market value upon: • The service provider’s involuntary separation from service for cause; or • The occurrence of a condition within the service provider’s control – Example: Non-compliance with a non-compete or non-disclosure agreement 16
Awards to Prospective Service Providers • Current regulations: – Stock rights may only be granted to employees and consultants who are providing services on the date of grant to the issuing company or its controlled subsidiaries • Problematic in employment negotiations if issuer wants to grant an equity award prior to the employee’s start date • Proposed regulations: – Modify the definition of “eligible issuer of service recipient stock” to include any entity for which is reasonably anticipated that the service provider will begin providing services within 12 months after the date of grant, and the person actually begins providing services within 12 months after the date of grant 17
Awards to Prospective Service Providers • Potential Application: – NSOs granted to prospective service providers are not automatically disqualified from exemption under Section 409A – However, awards to prospective employees and consultants may still not permitted under: • ISO rules ( see IRC 422(a)(2)) • Certain securities laws ( see Rule 701(c) of the Securities Act) • Many equity plans 18
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