December 3, 2008
As the 2008 calendar year comes to a close, employers must take a number of actions to address Sections 409A and 457A of the Internal Revenue Code for deferred compensation plans. Also, employers whose employer identification numbers end with "3" or "8" need to file their applications for IRS determination letters for their tax-qualified plans by January 31, 2009.
In addition to this client alert, we recently prepared an alert on various recent executive compensation developments. Among other things, companies should be planning their responses to pending "say on pay" legislation. Executives may want to accelerate income into 2008 in anticipation of higher marginal federal income tax rates that may be implemented beginning in 2009.
Section 409A Actions
December 31, 2008 is the final deadline to take the following actions with respect to Section 409A of the Code:
In addition, December 31, 2008 is the final deadline for "fixing" stock options and stock appreciation rights that were "in the money" when granted. (The deadline was December 31, 2006 for certain options granted to Section 16 officers and directors, and that deadline was not extended.) The correction can be effected by either increasing the option/SAR exercise price to the fair market value of the underlying shares as of the date of grant or by "hard-wiring" the exercise date for a year other than the year in which the correction is made. In addition, if an employer wishes to make employees whole with a cash payment or other consideration in connection with an increase in the exercise price made before the December 31, 2008 deadline, the payment cannot be made in 2008.
Our June 26, 2008 client alert provides more details on these issues. In order to avoid highly adverse tax treatment of participants in deferred compensation plans beginning on January 1, 2009, employers and other service recipients must act by year-end to modify their compensation arrangements as necessary.
Code Section 457A
In general, new Section 457A of the Code prohibits deferrals of compensation after December 31, 2008 by U.S. taxpayers under certain deferred compensation and equity-related arrangements of "nonqualified entities." Our October 30, 2008 client alert provides a detailed summary of Section 457A.
The term "nonqualified entity" generally includes the foreign fund entity utilized by many hedge funds as part of a standard compensation deferral structure (though some private equity and hedge fund entities (foreign or domestic) and other foreign operating entities may be swept up in the broad definition of "nonqualified entities"). Affected compensation arrangements need to be amended by December 31, 2008 to avoid becoming subject to new Code Section 457A. Thus, companies potentially subject to this law need to review (and, if necessary, amend) their compensation arrangements by year-end.
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 "3" or "8" must file applications for their plans no later than January 31, 2009 in order to be protected by the "remedial amendment period." The program then opens from February 1, 2009 through January 31, 2010 for employers whose EINs end in "4" or "9".
Gibson, Dunn & Crutcher lawyers are available to assist clients in addressing any questions they may have regarding these issues. Please contact the Gibson Dunn attorney with whom you work, or
Stephen W. Fackler (650-849-5385, email@example.com),
Ronald O. Mueller (202-955-8671; firstname.lastname@example.org)
Charles F. Feldman (212-351-3908, email@example.com),
David West (213-229-7654, firstname.lastname@example.org),
David I. Schiller (214-698-3205, email@example.com),
Michael J. Collins (202-887-3551, firstname.lastname@example.org),
Sean Feller (213-229-7579, email@example.com),
Amber Busuttil Mullen (213-229-7023, firstname.lastname@example.org),
Jennifer Patel (202-887-3564, email@example.com),
Meredith Shaughnessy (213-229-7857; firstname.lastname@example.org)
Chad Mead (214-698-3134, email@example.com),
Jonathan Rosenblatt (650-849-5317, firstname.lastname@example.org),
John C. Cook (202-887-3665; email@example.com)
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