The Internal Revenue Service has extended the deadline to document compliance with its Section 409A rules on deferred compensation by a year—and companies still have lots of compliance work to get done right now anyway.
As Compliance Week has previously reported, the IRS extended the deadline for making final amendments to deferred compensation plans, but did not extend the deadline for taking other actions required to comply with Section 409A. That means most companies will still need to take numerous actions by year-end, according to a bulletin from the Pillsbury Winthrop Shaw Pittman law firm.
Lawson
Since deferred compensation plans must be operated in strict compliance with the final 409A regulations beginning Jan. 1, plan administrators must be familiar enough with the rules by then to apply them, Pillsbury partner Kurt Lawson, author of the alert, says. Time and form of payment of any deferred compensation existing as of Jan. 1, 2008, must be documented by then, although in less detail than would’ve been required under the final rules.
The Pillsbury bulletin cites several tasks that must be completed by year-end:
Identify deferred compensation plans subject to Section 409A and review them to ensure that they operate in strict compliance with the final rules.
Make any changes in time and form of payment that would otherwise violate the antitrust acceleration and subsequent deferral rules, as well as any changes to time and form of payment to avoid Section 409A entirely.
Designate in writing a compliant time and form of payment for all deferred compensation (mandatory and elective) that won’t be paid by Jan. 1, 2008. Refer to IRS Notice 2007-78 for helpful rules for designating compliant times and forms of payment.
Lawson says that in his observation, companies still have a lot of work to do just identifying all their deferred compensation agreements; individual employment and separation agreements and foreign plans are particular challenges, he says. Another problem is digesting the final regulations to be in a position to comply in 2008. The final rules “are long and require lots of choices, and new issues pop up almost every time you go to apply them,” says Lawson. Companies will also need to get hundreds of individual payment elections documented by the end of this year.
In addition, the alert suggests the following tasks for action in 2008:
Operate all deferred compensation plans and arrangements in strict compliance with Section 409A and the final regulations.
Keep close track of how each plan and arrangement is operated. Once certain rules are adopted in operation, they’re effectively treated as part of the plan and can’t be changed except to the extent permitted by Section 409A and the final rules. Those rules have to be incorporated into the plan when it’s retroactively amended to comply with the regulations.
Designate in writing a compliant time and form of payment for all deferred compensation effectively deferred after Dec. 31, 2007, unless the final rules allow the designation to be made at a later date.
Amend each deferred compensation plan and arrangement retroactive to Jan. 1, 2008, to comply with Section 409A and the final regulations before the Dec. 31, 2008, deadline.
Fraud Survey Shows Who’s Vulnerable
Eighty percent of large companies have experienced some sort of fraud in the last three years, a new report says, although executives often have the wrong idea about what sorts of frauds pose the greatest risk to their businesses.
According to an extensive survey conducted by the risk-consulting firm Kroll, one-third of companies have experienced theft of assets or stock—but few executives regard that fraud as a serious threat. The report surveyed nearly 900 executives at large companies in Europe, Asia, and North America.
That misperception about vulnerability to theft may arise because, “for a threat to be seen as serious, it is not enough for it to be common,” the report notes. “It must strike at a high-value asset, and that asset must be in some way critical to the business.”
Likewise, no sector regarded internal financial fraud as a high risk, but it is one of the most commonly reported issues. Executives considered it less of a threat than information theft, money laundering, and the theft of physical assets, according to the report.
Nearly half of companies rank themselves as at least moderately vulnerable to a wide range of threats: regulatory or compliance breach (50 percent); management conflict of interest (49 percent); financial mismanagement (49 percent); procurement fraud (47 percent); theft of physical assets (47 percent); corruption and bribery (46 percent); and intellectual property theft (45 percent).
Still, specific fraud concerns vary widely by sector. The health care, pharmaceuticals, and biotechnology sectors—the most vulnerable of the sectors examined—believe themselves at high risk of corruption and bribery; regulatory or compliance breaches; information theft or loss; IP theft; and vendor or supplier fraud.
In contrast, the construction and engineering sector faces corruption, theft of physical assets, financial mismanagement, regulatory breach, and information theft or loss. Financial services is the only industry perceived to face a high risk of money laundering, but also faces high risks of regulatory and compliance breaches, information theft, and conflict-of-interest.
The natural resources sector regards itself as highly exposed to corruption and vendor fraud, while professional services firms focus on information theft or loss, IP theft, and management conflict-of-interest. Manufacturing respondents identified corruption, information theft, and conflict-of-interest as high risks, while technology, media, and telecoms firms saw information theft and IP theft as significant issues.
SEC Updates FAQs on Internal Controls
The staff of the Securities and Exchange Commission has updated its list of frequently asked questions related to management’s report on internal control over financial reporting and certification of disclosure in Exchange Act reports.
The staff has added four new FAQs that pertain to how the requirements apply to foreign private issuers and eliminated a dozen FAQs that are no longer relevant, or were addressed by the SEC’s publication of interpretive guidance for management in May.
The remaining FAQs, which have been renumbered, are substantially the same.
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