Section 409A of the Internal Revenue Code, regulating deferred compensation arrangements, can create traps for employers in situations where the employer wants to offset against amounts owed to the employer, unpaid amounts owed by the employee. For instance, if an employee has an obligation to reimburse an employer for certain expenses, that obligation cannot provide that the employer can offset that obligation against amounts of deferred compensation the employee is entitled to receive in the future. These types of offsets are considered prohibited accelerations of the deferred compensation payments, in violation of Section 409A. There is a limited exception for an offset of future deferred compensation amounts so long as the offset does not exceed $5,000. An employer also is not prohibited from making offsets from deferred compensation amounts at the time those amounts are otherwise payable.
Statements Due to Participants Who Exercised Incentive Stock Options in 2012 or Transferred Shares Acquired under an Employee Stock Purchase Plan in 2012
The January 31, 2013, deadline is approaching for an employer to provide statements to employees or former employees who exercised incentive stock options in 2012 or who first transferred legal title to shares acquired under an employee stock purchase plan with an option price between 85 percent and 100 percent of fair market value of the stock. In addition, the employer must file IRS Forms 3921 and 3922 with the IRS by February 28, 2013. The requirement can be found here. Related Treasury Regulations can be found here.
Federal District Court Holds that ?Ç£Top Hat?Ç¥ Plan is not an ERISA Plan and Executive?ÇÖs Claims are not Pre-Empted by ERISA
The former president of a credit union service organization (?Ç£Executive?Ç¥) brought several state-law claims for breach of contract and misrepresentation against his employer in connection with an agreement to terminate an Executive Deferred Compensation Plan (the ?Ç£Plan?Ç¥).?á The credit union had been in severe financial distress and had offered to partially vest the Executive?ÇÖs benefit, terminate the Plan and pay the Executive a distribution of $234,068.18 in exchange for his agreement to the Plan termination.?á Before the credit union could pay the Executive, it was placed into conservatorship.?á The conservator repudiated the agreement with the Executive.?á The Executive then terminated his employment and filed suit in Texas state court.?á The credit union removed the case to a federal district court and filed a motion for summary judgment on the basis that the Executive?ÇÖs state-law claims were preempted by ERISA.?á The court analyzed whether the Plan is an ERISA employee welfare… Continue Reading
Correct any severance plans, change-in-control agreements, or other employment arrangements that are subject to Code Section 409A and that improperly condition the timing of payments on the executive executing a release of claims, noncompete agreement, or other document.
Institutional Shareholder Services, Inc. (?Ç£ISS?Ç¥) issued draft policies for 2013 relating to board governance and to executive compensation.?á ISS is proposing the following changes: Recommend a vote ?Ç£against?Ç¥ or ?Ç£withhold?Ç¥ from the entire board if the board failed to act on a shareholder proposal that received the support of a majority of shares cast (rather than outstanding) in the previous year. Use a company?ÇÖs selected peers with size constraints as an input to its peer group methodology Incorporate a comparison of realizable pay to grant date pay as part of the qualitative evaluation of pay-for-performance alignment. Add pledging of company stock as a factor that may lead to negative recommendations under the existing problematic pay practices evaluation. Include existing change-in-control arrangements maintained with named executive officers in its current policy on Golden Parachute proposals (rather than focusing only on new or extended arrangements). A copy of the draft policies is?áhere.
As a reminder, the transition relief period provided by IRS Notices 2010-6 and 2010-80 under the Code Section 409A document correction procedure will end on December 31, 2012.?á By that date, employers must have corrected any severance plans, change-in-control agreements, or other employment arrangements that are subject to Code Section 409A and that improperly condition the timing of payments on the executive executing a release of claims, noncompete agreement, or other document.?á The employer must also provide notice to the IRS about the change.?á If the affected arrangement is not brought into compliance with Code Section 409A by that date, additional reporting requirements will apply.?á Failure to amend the arrangement prior to the date the payment trigger event occurs will result in substantial tax penalties being assessed on the affected employee.
The company’s long-term incentive plan and equity compensation plan permitted pro-rata payment of shares prior to full vesting if termination of employment occurred due to retirement or involuntary termination without cause. “Retirement” and “involuntary termination” were not defined in the plans. The plans gave an Executive Compensation Committee (ECC) authority to interpret and administer the plans. Two former executives terminated employment when company assets were sold and they declined to accept continued employment at transfer locations. The company’s Senior Vice President of Administrative Services, Authorized Representative and Fiduciary to the Benefit Plan Committee, who was not a member of the ECC, determined that the former executives did not terminate employment due to retirement or involuntarily without cause. The Court of Appeals found that the Senior Vice Presidents’ decision was not entitled to any deference because the plans gave discretionary authority only to the ECC and the ECC did not decide… Continue Reading
The Internal Revenue Service recently released Revenue Procedure 2012-29 to provide sample language for taxpayers?ÇÖ use when making an election under Section 83(b) of the Internal Revenue Code. Section 83(a) generally provides that when the service provider’s rights in property received in connection with the performance of services become transferable and no longer subject to a substantial risk of forfeiture, then he must include the excess of the fair market value over the basis in property in income. Section 83(b) permits the service provider to elect to include in income the excess of the fair market value of the property at the time of the transfer over the amount paid for the property, as compensation for services, provided the election is made within 30 days after the transfer. The Revenue Procedure provides sample language that may be (but is not required to be) used for making such an election. The… Continue Reading
Dividends and Dividend Equivalents May be Performance-Based Compensation under Code ?º 162(m) Even if Received Prior to Vesting of Restricted Stock or Restricted Stock Units
The IRS has confirmed that dividends and dividend equivalents relating to restricted stock and restricted stock units (RSUs) are separate grants from the restricted stock and RSUs, and must separately satisfy performance-based compensation requirements in order to avoid being counted toward the $1 million deduction limit on compensation under Internal Revenue Code ?º 162(m). For example, if an employee?ÇÖs right to dividends and dividend equivalents vests and becomes payable only upon satisfaction of the same performance goals that apply to the related grants of restricted stock and RSUs, then the dividends and dividend equivalents are excluded from compensation for purposes of applying the $1 million deduction limitation. However, if an employee receives dividends and dividend equivalents at the same time that dividends are paid on the company?ÇÖs common stock prior to vesting of the restricted stock and RSUs and achievement of related performance goals, then these amounts are not qualified… Continue Reading
Final SEC Rule Regarding Listing Standards for Compensation Committees and Amendment to Proxy Disclosure Rules
The SEC issued a Final Rule, as required by the Dodd-Frank Act, that requires securities exchanges to adopt listing standards to address the independence of compensation committee members and the committee?ÇÖs authority to retain compensation advisers, consideration of the independence of compensation advisers, and responsibility for the appointment, compensation and oversight of the work of any compensation adviser. Each national securities exchange and national securities association must provide the SEC its proposed rule changes that comply with the Final Rule no later than 90 days after the Final Rule?ÇÖs publication in the Federal Register. Each national securities exchange and national securities association must have final rules or rule amendments that comply with the Final Rule approved by the SEC no later than one year after publication in the Federal Register. Once an exchange?ÇÖs new listing standards are in effect, a listed company must meet the standards in order for its… Continue Reading