We work in an extremely complex and technical area and it is easy to overlook issues.
At the end of 2008 we were all scurrying to be sure we had identified and amended all arrangements that involved 409A deferred compensation. That is more than 3 years ago and we may not currently be as focused on identifying 409A arrangements and issues as we were in 2008. Yet it is important to consider 409A issues today. For example, executive agreements often involve 409A arrangements.
409A requires both operational and documentary compliance with technical rules, including rules dealing with the timing of payments. In general, to change the timing of the payment of 409A deferred compensation the change must not be effective until at least 12 months after the change is made and the change must defer the timing of payments for at least 5 years from the original scheduled payment date. An executive and employer renegotiating an employment agreement with 409A deferred compensation must be very careful to avoid violating the payment timing rules for 409A deferred compensation in their renegotiated agreement. 409A also applies to the substitution of compensation for 409A deferred compensation. With say on pay votes for executive compensation at public companies and the general emphasis on pay for performance and good corporate governance, companies are asking some executives to give up certain portions of their compensation packages. To the extent executives are receiving something in exchange for the give up of 409A deferred compensation, the 409A substitution rules may make it difficult for those substitution payments to be made on a different timing basis than the payments being given up.
Although the IRS has issued correction programs for both operational (IRS Notice 2008-113) and document (IRS Notice 2010-6) failures, not all 409A issues are included in such correction programs. Even corrections within the programs can cause employees to incur additional tax, tax reporting complications and different-than-desired payment timing so ongoing 409A compliance is important.
There are specific document requirements for 409A arrangements. For example, there needs to be specific language with respect to certain key employees of public companies regarding the general six month delay after separation from service for payments triggered by such separation from service. Other 409A language may be more nuanced. A provision that agreements are to be interpreted consistent with the intention that payments are exempt from 409A or the intention that the payments comply with 409A and that the agreements will be operated in accordance with such intention can be very helpful in dealing with arguably conflicting or ambiguous provisions within agreements and will help to remind the parties to consider 409A before renegotiating, amending or terminating 409A arrangements.
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