More Time To Document 409A Compliance

The Internal Revenue Service and the Treasury Department have given companies another year to document their compliance with Section 409A, the migraine-inducing part of the tax code governing deferred compensation agreements.

The effective date of the final Section 409A rules is still Jan. 1, 2008, but companies will not need to document their compliance until Dec. 31, 2008. They originally had to have their documentation in order by Dec. 31 of this year, or individuals receiving the deferred compensation would face hefty taxes and penalties.

While the extension is welcome, compensation experts warn that it is not an excuse for companies to put off attention to Section 409A for another year.

“Companies still need to take action by year-end,” notes Marjorie Glover, a partner in the law firm Chadboure & Parke. Specifically, Glover says, participant time and form of payment elections must be made and certain plan design features must be adopted by Dec. 31. For instance, she says, supplemental and excess plans must be de-linked from qualified plans by year-end. In addition, transitional relief in place through year-end generally wasn’t extended.

And the extension might be too late for some companies that have already “bitten the bullet” and amended their plans earlier this year, anticipating a 2007 deadline. Still, even for companies that have adopted plan amendments, “This gives them more time to clarify and adopt further amendments,” she says.

Olshan

While the additional year for documentary compliance “will certainly help with some of the administrative burden,” it doesn’t go as far as many had hoped, says Regina Olshan, a partner at Skadden, Arps, Slate, Meagher & Flom.

Last month, Olshan authored a letter signed by 92 other law firms asking the IRS for a one-year extension on the compliance date. They argued that companies have hundreds of inter-related compensation agreements to review, analyze, and possibly amend—and since final Section 409A rules were published only last April, companies simply don’t have the time to wade through all that paper.

Olshan says she appreciates the IRS’s action, which she calls “absolutely necessary.” But, she adds, “We hope they may yet do more.”

“I'm glad they responded,” Olshan says. “But I also feel disappointed that they didn’t seem to take to heart our real concern about the need for time to analyze and understand the rules as they apply to clients’ arrangements.”

According to IRS Notice 2007-78, the Treasury and IRS also plan to issue guidance containing a limited voluntary compliance program that will permit corrections of certain unintentional operational violations of section 409A. That is meant to address the especially awkward problem that noncompliant compensation agreements will put taxes and penalties on the individual who receives the payment, but those people often have little control over—or even awareness of—compliance obligations.

Olshan says it’s hard to say how helpful that voluntary program will be without seeing the details. In the mean time, she says, companies should continue “full speed ahead” with their 409A compliance efforts.

California Backdated Options Program Reaps Nearly $31 Million

Thousands of employees dodged a tax bullet related to discounted or improperly priced stock options and stock appreciation rights they may have unwittingly received, under a California program that gave companies a chance to pony up the taxes on behalf of their affected employees.

The California Franchise Tax Board collected nearly $31 million from 46 companies. Those companies agreed to pay taxes their employees incurred last year from backdated or otherwise improperly priced stock options and SARs. Under tax rules for nonqualified deferred compensation, improperly priced options may trigger a 20 percent surtax and additional interest on top of the ordinary income tax.

California companies are the epicenter of the backdated options controversy, since so many Silicon Valley companies use stock options as a form of compensation. State Controller and FTB Chair John Chiang said nearly 3,700 employees—many probably blissfully unaware of the tax consequences related to their options—benefited from the program.

The California program corresponded with a federal compliance resolution program announced earlier this year by the Internal Revenue Service that enabled employers to pay the taxes incurred by their employees because of backdating. The programs only applied to rank-and-file employees and weren’t available for most corporate executives or other insiders who exercised discounted stock options.

Small Business Forum on SEC Rule Proposals

The flurry of recent rule proposals addressing securities registration and disclosure requirements for smaller companies will top the agenda at the Securities and Exchange Commission’s annual Forum on Small Business Capital Formation next week.

The Sept. 24 forum, which will be held at SEC headquarters, will include two morning roundtable discussions: one focusing on recent rule proposals relating primarily to private companies, and a second to consider proposals concerning smaller public companies. Both will be open to the public and Webcast on the SEC Web site, www.sec.gov.

The SEC says it will post further information about the forum, including the complete agenda and list of roundtable participants, as arrangements are completed.