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October 30 , 2006
On October 4, 2006 the Internal Revenue Service issued additional transition relief regarding the application of Section 409A of the Internal Revenue Code to nonqualified deferred compensation plans. The highlights of this relief include the following:
- The Internal Revenue Service and Treasury Department are finalizing the proposed 409A regulations published on October 4, 2005. The final regulations are anticipated to be issued before the end of 2006 with an effective date of January 1, 2008.
- A plan will not be treated as violating 409A on or before December 31, 2007, if the plan is operated in reasonable good faith compliance through that date with 409A and guidance issued thereunder, and the plan is amended on or before December 31, 2007 to conform to 409A and guidance thereunder including the final regulations.
- Prior to January 1, 2008, compliance with the proposed regulations or the final regulations will constitute reasonable good faith compliance.
- A plan may provide, or be amended to provide, for new payment elections with respect to the time and form of payments without violating 409A, provided the elections comply with 409A and are made on or before December 31, 2007 (and the plan is amended to comply with 409A before that date). This election or amendment, if made during 2006, can apply only to amounts that would not otherwise be payable in 2006 and may not cause an amount to be paid in 2006 that would not otherwise be payable in that year. Similarly, if the election or amendment is made during 2007, it may not defer any payment otherwise due in 2007 or accelerate any payment into 2007.
- The ability to link a payment election under a nonqualified deferred compensation plan to an election under a qualified plan has been extended to December 31, 2007. This relief is available if the determination of the time and form of payment is made in accordance with the terms of the nonqualified deferred compensation plan payment election provisions in effect on October 3, 2004. However, other Internal Revenue Code and common law tax doctrines, including those related to constructive receipt of income, continue to apply to any such election as to the time and form of payment under the nonqualified deferred compensation plan.
- Options and stock appreciation rights ("SARs") granted with an exercise price below the fair market value of the underlying stock on the grant date are generally subject to the 409A deferred compensation rules and restrictions. The proposed regulations permit companies to replace these "discount" options and SARs with new options and SARs meeting the 409A requirements (i.e., providing fixed payment terms consistent with 409A or which have been "repriced" to eliminate any discount from the underlying stock's fair market value at grant). The proposed regulations extended the deadline to fix or replace discount options and SARs to December 31, 2006, only to the extent a cancellation and re-issuance of the discount option or SAR in 2006 does not result in the cancellation of the option or SAR in exchange for cash or vested property in 2006. Except as described below, this deadline has been extended until December 31, 2007 to the extent the cancellation and re-issuance of discount options or SARs in 2007 does not result in a cancellation in exchange for cash or vested property in 2007.
This extension of the 12/31/06 deadline is not available for any discount option or SAR of a public company granted to a person who, as of the date of grant, was subject to the disclosure requirements of Section 16(a) of the Securities Exchange Act of 1934, if with respect to the grant of such option or SAR the company either has reported or reasonably expects to report a financial expense due to the issuance of the discount option/SAR that was not timely reported on the proper financial statements or reports. The period during which such discount stock options and SARs may be cancelled and reissued to comply with 409A will expire on December 31, 2006. |
For more information on this matter, please contact a member of the Schiff Hardin Employee Benefits and Executive Compensation Group.
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