Corporate Securities Law Blog

Less than six months remain until the December 31, 2005 deadline for amending deferred compensation arrangements to comply with Section 409A of the Internal Revenue Code. These complex new rules were enacted for nonqualified deferred compensation arrangements in late 2004 and are effective for 2005, although IRS guidance so far has been limited. While awaiting additional guidance, expected later this year, you need to act now to ensure compliance. These new rules, including severe tax penalties for noncompliance, were summarized in our November 2004 Employee Benefits Update.

Deferred Compensation Arrangements Defined Broadly

These new rules apply to arrangements not traditionally thought of as deferred compensation. Stock options, phantom stock, restricted stock units, stock appreciation rights, employment agreements, severance plans, bonus plans, incentive plans, separation agreements, and layoff plans all may be "deferred compensation arrangements" within the scope of Section 409A.

Action Steps

Employers need to act now to:

• Identify existing deferred compensation arrangements.
• Review these arrangements for provisions requiring amendment.
• Prepare to amend or terminate these arrangements, obtaining any necessary corporate approval.
• If employers decide to amend, they should generally postpone doing so until the IRS issues the anticipated additional guidance, since amounts deferred and vested before January 1, 2005 could lose their grandfather status if an arrangement is materially modified.
• If terminated, all amounts deferred under the arrangement must be distributed and included in participant income in 2005.
• Communicate and implement the adopted amendments or termination.

For further information, please contact David Paik at (213) 620-1780.