Corporate Law

• Delaware Cases Contain Surprises On Fee Advancement Bylaws

Securities Enforcement & Fraud

• Regulators Seek To Protect Retirees From Securities Fraud

Global Markets

• US, UK, And Australian Regulators Address Short-Selling Concerns

• Culture And Language Impediments To IFRS Universality

Securities Regulation & Disclosure

• Tips From The SEC On Using Corporate Websites For Disclosure

Financial Reporting, Taxation, & Accounting

• Changed Rule On Timing Of Deferred Compensation Now In Full Effect

• As Stocks Decline, Companies Bid Farewell To Goodwill

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Compensation planning just got trickier. Companies have long had fairly wide latitude in timing the distribution of taxable deferred compensation such as severances, bonuses, equity compensation, and post-employment benefits. Beginning in 2009, however, that latitude will be severely constricted because IRC Section 409A and its regulations take full and final effect. The rule impacts the conditions under which companies may accelerate or defer payments as well as which payments they can restructure or delay. Generally, it prohibits the discretionary acceleration of payment of a deferred amount, explains attorney Daniel Hogans. Section 409A, which is effective for certain types of compensation deferred on or after December 31, 2005, became fully operational on January 1, 2009. The restrictions bring a new set of complications to compensation planning and, in many cases, present considerable hurdles for those seeking to mold compensation arrangements to a company's needs and circumstances.

Six-month delay. Under Section 409A, the company must specify the timing of a deferred payment by the deadline date for deferral elections, and deferred compensation can be paid only on a specific date or schedule, upon separation of service, or as a result of disability, death, emergency, or other unforeseen events. The rule does not apply to short-term deferrals or involuntary terminations. Companies must also delay payments to specified key employees for six months from the date of separation from service. The author indicates that "separation from service" occurs when there is at least an 80% reduction in the employee's service with the employer, but not when the reduction is 50% or less. For a reduction between 50% and 80%, the specific circumstances must be considered to determine whether the six-month delay is triggered. All this presents several new administrative obligations, including the need to maintain a list of the specified key employees and to update documents and agreements to reflect this delay.

Changes in ownership, severance, and acquisitions. The author notes that Section 409A may also apply to payments triggered by a change in ownership. It includes several definitions of an "acquisition," including the purchase of more than 50% of the total voting power of the stock or more than 40% of the target's assets. While certain severance benefits fall under the 409A umbrella, a number do not. Companies have broader discretion with compensation distributed as a result of involuntary termination as well as with short-term deferrals, those that specify the employee has no legally binding right to the payment for 10 weeks after a specified date. Other exclusions from the rule include additional separation benefits (such as taxable health benefits payable during the post-separation COBRA period) and, under many circumstances, stock options and stock appreciation rights.

Delaying rather than accelerating. Acquirors seeking to retain key target managers generally focus on delaying payments rather than accelerating them. In the past, acquirors have been able to delay management payouts and make them contingent on certain performance goals. Now, however, the ability to structure such arrangements is severely curtailed by Section 409A, although opportunities for planning still exist through vesting schedules and other means.

Abstracted from Tax Management Compensation Planning Journal, published by BNA Tax Management, 1250 23rd Street NW, Washington DC 20037. For more information, call Bureau of National Affairs, (800) 372-1033; or visit www.bna.com/tm/jc_compplanjournal.htm.