December 7, 2006
As another year comes to a close, employers must take a number of actions to (i) address Section 409A of the Internal Revenue Code, (ii) amend their tax-qualified retirement plans to reflect certain rules that became effective in 2006, and (iii) begin operating their plans in compliance with new rules that become effective on January 1, 2007. In addition, employers whose employer identification numbers end with "1" or "6" need to file their tax-qualified plans for an IRS determination letter by January 31, 2007. Finally, the SEC’s new executive compensation rules generally are effective for fiscal years ending on or after December 15, 2006, and therefore will apply to disclosures of 2006 compensation in companies’ 2007 proxy statements.
Section 409A Actions
Notice 2006-79 extended most of the Section 409A transition rules to December 31, 2007. However, the following actions need to be taken by December 31, 2006 in order to comply with Section 409A:
New payment elections can be made in 2006 with respect to amounts subject to Section 409A, as long as those elections do not move payments into or out of 2006. A similar rule applies for 2007. Thus, if there is a desire to move payments into or out of 2007, action must be taken by December 31, 2006.
Deferral elections for non-"performance-based compensation" to be earned in 2007 generally must be made by December 31, 2006.
IRS Notice 2006-79 generally extended to December 31, 2007 the deadline for "fixing" stock options and stock appreciation rights that were "in the money" when granted. However, the deadline remains December 31, 2006 to fix certain options granted to Section 16 officers and directors. See our publication at IRS Extends Section 409A Transition Relief Through December 31, 2007 for more details.
Tax-Qualified Retirement Plans
A number of actions need to be taken both to bring plans into compliance in form and implement law changes made by the Pension Protection Act of 2006:
Plans generally must be amended by December 31, 2006 for "optional" changes not required by the tax qualification rules. For example, the expanded "hardship" rules under the final section 401(k) regulations could be implemented as early as January 1, 2006, and plans that took advantage of that change must be amended by December 31, 2006. Other examples of optional changes that need to be reflected by year-end if implemented in 2006 include "Roth" 401(k) plans and the restrictions on the use of nonelective contributions to satisfy IRS nondiscrimination requirements.
Other changes made by the final 401(k) plan regulations, such as the revised methodology for calculating "gap period" earnings on refunds to employees, generally must be adopted by the employer’s extended tax return due date for 2006.
Plans that include employer stock as an investment option generally are required to provide participants a notice describing the virtues of diversification by December 31, 2006. This requirement appears to apply even to plans that have long allowed full diversification rights to participants and have detailed discussions of the value of diversification in SPDs and other documents. A model notice was provided in IRS Notice 2006-107.
The Pension Protection Act of 2006 made a number of changes to the rules regarding plan qualification and the treatment of distributions. See our detailed summary here: Major Pension Legislation Enacted. For example, beginning on January 1, 2007, faster vesting rules apply to employer profit sharing contributions, nonspouse beneficiaries have the ability to "roll over" eligible rollover distributions, and various notice requirements are changed. These changes will require employers to make several administrative changes, including updating distribution packages.
Determination Letter Applications
In Revenue Procedure 2005-66, the IRS implemented a system of staggered five-year remedial amendment cycles for individually designed plans and opened the determination letter program for changes made by the Economic Growth and Tax Relief Reconciliation Act of 2001 and subsequent legislation. The filing deadlines generally vary based on the last number in the employer’s identification number ("EIN"). Plan sponsors whose EINs end in "1" or "6" must file applications for their plans no later than January 31, 2007 in order to be protected by the "remedial amendment period." The program then opens from February 1, 2007 through January 31, 2008 for employers whose EINs end in "2" or "7" (as well as for multiple employer plans).
Executive Compensation Disclosure Rules
The new, and much expanded, executive compensation disclosure rules will apply to proxies filed in the 2007 proxy season. Public companies that have not already started gathering the required information and drafting the disclosures should do so as soon as possible.
Gibson, Dunn & Crutcher lawyers are available to assist in addressing any questions you may have regarding these issues. Please contact the Gibson Dunn attorney with whom you work, or
Stephen W. Fackler (650-849-5385, [email protected]),
Charles F. Feldman (212-351-3908, [email protected]),
David West (213-229-7654, [email protected]),
David I. Schiller (214-698-3205, [email protected]),
Michael J. Collins (202-887-3551, [email protected]),
Sean Feller (213-229-7579, [email protected]),
Amber Busuttil Mullen (213-229-7023, [email protected]),
Jennifer Patel (202-887-3564, [email protected]) or
Chad Mead (214-698-3134, [email protected]).
© 2006 Gibson, Dunn & Crutcher LLP
The enclosed materials have been prepared for general informational purposes only and are not intended as legal advice.