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IRS Updates Nonqualified Deferred Compensation Audit Technique Guide

The IRS recently updated its Nonqualified Deferred Compensation Audit Technique Guide (the “Updated Guide”), which replaces the previous version published in June 2015. The Updated Guide provides more detailed guidance on the legal standards applicable to deferred compensation arrangements, including the addition of specific citations to relevant regulations and revenue rulings. Notably, the Updated Guide also includes significantly expanded discussions about Code Section 409A and its application to deferred compensation arrangements. Code Section 409A, and other regulations impacting deferred compensation, are very complicated and can carry substantial penalties and taxes for noncompliance. As Congress and the Biden Administration look for additional sources of funding for their initiatives, heightened IRS audit activity may be on the horizon. The Updated Guide is a good reminder to employers that they should periodically review their nonqualified deferred compensation arrangements, not only for documentary compliance but operational compliance as well. The Updated Guide is available… Continue Reading

Equity Awards Granted to U.S. Participants by Non-U.S. Entities Can Lead to Unintended Consequences

Because of the various benefits, securities, and tax laws that apply to equity awards, what may be permissible (and even commonplace) in one jurisdiction, may be problematic in another. Accordingly, whenever an issuer desires to issue equity awards to service providers (e.g., employees or contractors) in a different jurisdiction, the issuer should engage benefits, securities, and tax counsel in all relevant jurisdictions early in the process to avoid any unanticipated issues that could negatively impact the value or purpose of the awards. For example, a common issue occurs when the issuer is an entity outside of the United States, but equity awards will also be made to service providers in the United States. Under U.S. tax law, there are specific requirements for determining the exercise price of stock options and stock appreciation rights (under Section 409A of the U.S. Internal Revenue Code (?Ç£Section 409A?Ç¥)) that require the exercise price to… Continue Reading

Ordinary Employee Benefits Issues That Can Cause Extraordinary Problems in M&A Deals

Employee benefits rarely drive corporate transactions, but if the benefits of a target company are not reviewed carefully, they can sometimes derail the transaction.  Even some of the most routine facets of benefit plan administration can result in significant potential financial exposure (e.g., additional employer contributions, taxes, penalties, and fees as well as fees associated with the preparation and filing of IRS and DOL correction program applications) that could negatively affect the overall value of the target company. By identifying issues early in the transaction, the seller can prevent costly purchase price reductions and identify issues that need correction, while the buyer can avoid overpaying for a target and ensure that representation and warranty insurance will be available to cover potential claims. Some of those routine compliance issues include, but are not limited to, the following: Failing to timely file an annual Form 5500.  The DOL can assess a penalty… Continue Reading

December 31st Deadline to Amend Deferred Compensation Plans

The 2017 Tax Cuts and Jobs Act (the ?Ç£TCJA?Ç¥) significantly amended Section 162(m) of the Internal Revenue Code (?Ç£Code?Ç¥) by expanding the definition of a ?Ç£covered employee?Ç¥ to also include an employee who was formerly a ?Ç£covered employee?Ç¥ of the publicly traded corporation (i.e., the “once a covered employee, always a covered employee”?árule). Under this expanded rule, anyone who was a covered employee of the publicly traded corporation (or any predecessor) for any taxable year beginning on or after January 1, 2017, will continue to be a covered employee for taxable years beginning in 2018 and later, even after the employee?ÇÖs separation from service. This change potentially impacts the availability of benefit payments under certain nonqualified deferred compensation plans which provide that payments may be delayed if the company?ÇÖs deduction would not be permitted under Code Section 162(m). The application of this “once-in, always-in rule” could thus result in a… Continue Reading

Keep It Simple: FASB Issues Proposed Standard to Simplify Accounting for Private Company Stock Options

Many privately-held companies use an independent valuation expert to value their common stock for purposes of establishing the exercise price for options granted to their employees, consultants, and outside directors. If this valuation is performed in accordance with Treasury Regulation ?º 1.409A-1(b)(5)(iv)(B)(2), then the valuation is given a presumption of reasonableness under the Internal Revenue Code, making it easier for the granting company to prove to third parties (including the IRS) that the value used was the underlying stock’s fair market value. However, even if a company used such a valuation to establish the exercise price, the company would not be able to use that valuation for purposes of accounting for the stock option awards under Financial Accounting Standards Board (?Ç£FASB?Ç¥) Accounting Topic 718. Instead, for accounting purposes, private companies would typically use an option-pricing model that required the company to provide various inputs, including the fair value of the… Continue Reading

Severance Arrangements and Code Section 409A

We recently posted an item that discussed when a severance policy would be subject to ERISA and the potential benefits of the policy being subject to ERISA (that post is available here). Another potential issue employers should consider is whether their severance arrangements are subject to Code Section 409A, which applies to certain deferred compensation arrangements. If a severance arrangement is subject to Code Section 409A, it must comply with Code Section 409A?ÇÖs various documentary and operational requirements to avoid the additional 20% tax and underpayment penalty that may be assessed for any compliance failures. Severance arrangements can be drafted to be exempt from Code Section 409A, such as under its short-term deferral and separation pay exceptions. If the severance arrangement is subject to Code Section 409A, some of the potential issues employers should consider include, among others: Any changes to the time or form of payments must comply with… Continue Reading

IRS Expands Definition of Qualified Individual for Loans and Coronavirus-Related Distributions under the CARES Act

Notice 2020-50 provides additional guidance to taxpayers and sponsors of qualified retirement plans regarding coronavirus-related distributions and loan extensions under the Coronavirus Aid, Relief, and Economic Security Act (the ?Ç£CARES Act?Ç¥). Among the guidance included in Notice 2020-50 are the following three items of special importance to plan sponsors: Notice 2020-50 expands the definition of ?Ç£Qualified Individual?Ç¥ for purposes of eligibility to receive a coronavirus-related distribution or special loan treatment to also include three new categories of individuals: an individual having a reduction in pay (or self-employment income) due to COVID-19 or having a job offer rescinded or start date for a job delayed due to COVID-19; an individual whose spouse or a member of the individual?ÇÖs household (as defined below) is quarantined, furloughed or laid off, or has work hours reduced due to COVID-19, is unable to work due to lack of childcare due to COVID-19, has a reduction… Continue Reading

EMPLOYEE BENEFIT/EXECUTIVE COMPENSATION CHANGES MADE BY THE CARES ACT

On March 27, 2020, Congress passed the Coronavirus Aid, Relief, and Economic Security Act (the ?Ç£CARES Act?Ç¥). This historic $2 trillion relief package received bipartisan support and is part of the third wave of federal government support as the nation copes with the acute economic fallout from the coronavirus (COVID-19) pandemic.  Some of the key provisions of the CARES Act that apply to health and welfare plans, educational assistance programs, retirement plans, executive compensation programs, and employment and payroll taxes are outlined below. Health and Welfare Plans Q1.      What COVID-19 testing and treatment is our company?ÇÖs employer-sponsored group health plan required to cover? The Families First Coronavirus Response Act (?Ç£FFCRA?Ç¥) requires an employer-sponsored group health plan (including a grandfathered plan under the Affordable Care Act (?Ç£ACA?Ç¥)) (a ?Ç£Plan?Ç¥) to provide coverage for COVID-19 diagnostic testing and services related to the diagnostic testing without any cost sharing (including deductibles, copayments, and… Continue Reading

Code Section 409A Transition Relief Period Ending December 31, 2012

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.

IRS Uses Section 409A Analysis to Determine if ?Ç£Retirement?Ç¥ Occurs for Pension Plan Purposes

A multiemployer pension plan, in an effort to permit employees to ?Ç£retire?Ç¥ under an early retirement benefit before that benefit was eliminated, proposed to let eligible participants ?Ç£retire?Ç¥ and then immediately return to work. In a private letter ruling, the IRS concluded these employees were not legitimately retired. In analyzing ?Ç£retirement?Ç¥ for qualified pension plan purposes the IRS looked at Section 409A and other sources. Although Section 409A addresses a nonqualified plan, the IRS stated that Section 409A?ÇÖs definitions regarding termination and separation from service are consistent with the definition of ?Ç£severance of service date?Ç¥ under the elapsed time method of crediting service. It also cited a prior revenue ruling that concluded an employee is not separated from service if the employee continues on the same job for a different employer post-corporate transaction. Based on this authority, the IRS concluded that ?Ç£retirement?Ç¥ requires the employee to stop performing services for… Continue Reading

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