Category Archives: Nonqualified Deferred Comp

Free CLE About Nonqualified Deferred Compensation and 409A

On Wednesday, June 13, 2012, from 1pm to 2:30pm ET, the Practical Law Company is hosting a free webinar on Section 409A: Expert Advice on Avoiding Common Pitfalls. Attending the webinar will earn CLE credit in New York (CLE credit in Illinois, Texas and Virginia is pending).

Speaking at the webinar are Daniel L. Hogans with Morgan Lewis and Regina Olshan with Skadden, Arps, Slate, Meagher & Flom LLP.

The topics they will be discussing during the webinar are:

  • How to identify compensation arrangements subject to Section 409A;
  • Requirements for supplemental executive retirement plans (SERPS) linked to tax-qualified plans;
  • Payment types for stock right awards;
  • “Good reason” termination provisions in employment agreements;
  • Avoiding impermissible severance toggles; and
  • Considerations applicable to payments conditioned on execution and non-revocation of a release.

To attend, you register through Practical Law Publishing’s website.

Today in ERISA History

May 8, 1990 – The Dept. of Labor issues Advisory Opinion 90-14A. It addresses a request by CSX Corporation on whether Title I of ERISA applies to a nonqualified deferred compensation plan which CSX proposed to adopt and maintain for the benefit of a select group of management or highly compensation employees. Specifically, CSX requested the DOL find that: (1) the plan is “unfunded” solely because the Plan permits employee-participants to elect to have payment of a stated percentage of their compensation deferred under the Plan; and (2) 29 CFR 2510.3-102 does not apply to amoounts of compensation subject to such deferral elections.

The DOL said that it would look to the IRS’ guidance on unfunded top-hat plans in making these determinations, and that 29 CFR 2510.3-102 was not relevant to these types of plans and does not apply to amounts of compensation subject to deferral elections made pursuant to such plans. Further, the DOL said that a plan which would otherwise be a bona fide “top hat” plan or “unfunded” excess benefit plan would not fail to be “unfunded” solely because the plan permmits employee-participants to elect to defer a certain percentage of their compensation.

After the DOL issues Advisory Opinion 90-14A, it does not release any further guidance on top hat plans for 18 years, until the Final 409A Regulations are issued by the IRS in 2007.

Today in ERISA History

May 7, 2007 - The IRS issues Final Regulations on the Application of Section 409A to Nonqualified Deferred Compensation Plans, known as the Final 409A Regulations. Congress added section 409A to the Internal Revenue Code as part of the American Jobs Creation Act of 2004, Pub. L. 108-357, 118 Stat. 1418. It generally provides that unless certain requirements are met, amounts deferred under a nonqualified deferred compensation plan for all taxable years are currently includible in gross income to the extent not subject to a substantial risk of forfeiture and not previously included in gross income.

The principal author of these regulations is Stephen Tackney of the Office of Division Counsel/Associate Chief Counsel (Tax Exempt and Government Entities).

Motorola Freezes Defined Benefit Plan and Ends 401(k) Match

In a sign of the times, Motorola announced that, effective March 1, 2009, it is freezing its defined benefit plan and, effective January 1, 2009, it will end matching contributions to its 401(k) plan. Motorola also announced that its co-CEOs will take a 25% decrease in base salary in 2009, and that one CEO will forgo his 2008 cash bonus earned under Motorola’s incentive plan. The other CEO will voluntarily reduce his bonus to an amount equal to the other CEO’s forfeited bonus and will take the remainder of the bonus in the form of restrict stock units.

What makes this newsworthy is the size and age of Motorola’s plans. A quick check of the 2006 Form 5500 filed on behalf of the Motorola Inc. 401(k) Plan, which is the most recent 5500 available, reveals that Motorola’s 401(k) plan had 46,795 participants with account balances on December 31, 2006. For 2006, the plan received $83,620,715 in employer contributions, which included the matching contributions Motorola made into the plan for 2006. The plan has been around since November 18, 1947.

The Motorola Inc. Pension Plan is even larger and almost as old. It has been around since January 1, 1958, and had 92,837 participants and beneficiaries entitled to receive benefits as of the end of 2006. Motorola contributed $161,696,867 in employer contributions into this plan in 2006.

The Motorola Elected Officers Supplementary Plan is much smaller and much younger. Created on November 9, 1988, this plan benefits 33 employees. Of these 33 employees, 20 employees are active participants and 13 participants are retired or separated participants entitled to future benefits as of December 31, 2006. This plan started 2006 with $91,658,191 in assets. It received $3,043,897 in employer contributions for 2006, had other income of $3,345,937, and paid benefits, including direct rollovers of $20,111,263, ending 2006 with $77,936,762 in assets.

As more employers, both large and small, are expected to reduce or end matching contributions for the 2009 plan years, it will be interesting to check back on this plan to see what happens to the 401(k) and defined benefit plans after the double-whammy of a bad stock market and no new employer matching contributions compared to what happens to the small non-qualified plan for Motorola executives.

Hat tip to FreeERISA.com for the 5500 information.

[tag]pension protection act, ppa, motorola, 401(k), defined benefit, ERISA[/tag]
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Interim CEO is Covered Employee for Purposes of 162(m) Tax Deduction

At what point does a member of a corporation’s board of directors qualify as an “outside director” of purposes of Code section 162(m)(4)(C)(i) after serving as an interim chief executive officer? The IRS answered this question today in Rev. Rul. 2008-32.

In Rev. Rul. 2008-32, the IRS addresses the situation where a CEO suddenly resigns, and the corporation’s Board of Directors hires one of the directors to serve as Interim CEO while the corporation hunts for a CEO. The IRS’ analysis is short and to the point:

“The determination of whether an individual is or was an officer is based on all of the facts and circumstances in the particular case, including without limitation the source of the individual’s authority, the term for which the individual is elected or appointed, and the nature and extent of the individual’s duties. Director A was in regular and continued service from January 7, 2008 through December 11, 2008. Company X did not employ Director A for a special and single transaction and Director A did not merely have the title of officer. Instead, Company X employed Director A for an indefinite period to serve as interim CEO with the full authority vested in that office. Accordingly, under the facts and circumstances analysis, Director A was an officer of Company X.”

Rev. Rul. 2008-32 holds that under these facts, a member of the board of directors who serves as an interim chief executive officer is not an “outside director” for purposes of Code section 162(m)(4)(C) and Treas. Reg. 1.162-27(e)(3). The underlying question for the corporation was the tax treatment of the $1 million base salary compensation plan provided to Director A for serving as the interim CEO as well as Director A particating in Company X’s executive bonus plan, which pays a percentage of base salary. Code section 162(a)(1) provide a deduction for a reasonable allowance for salaries and other compensation for personal services actually rendered. Code section 162(m)(1) provides that for a publicly held corporation, no deduction is allowed for remuneration which exceeds $1 million with respect to any covered employees. If Director A is a covered employee, then no deduction for Company X above the $1 million in remuneration. If Director A is not a covered employee, then Company X may have a deduction for remuneration paid to Director A above $1 million.

Company X contends that Director A is an “outside director” and therefore is not a covered employee, thus they get the deduction. IRS responds with Rev. Rul. 2008-32 that Director A is a covered employee based on their analysis, and thus no deduction above $1 million in remuneration.

[tags]Pension Protection Act, ppa, Interim CEO, 162(m)(1), 162(a)(1), outside director, ERISA[/tags]

Correcting Operational Failures in Non-Qualified Deferred Comp Plans

With the applicability dates for the Final 409A Regs looming, the IRS has released Notice 2007-100, which contains corrections to unintentional operational failures. The applicable words are “unintentional” and “operational”. Notice 2007-100 is clear that these corrections are not available for intentional failures, and they are not available for plan document failures.

Notice 2007-100 also states that the IRS is considering a formal correction program for certain operational failures to comply with Code section 409A which do not qualify for relief under Notice 2007-100.

[tags]Pension Protection Act, ppa, Notice 2007-100, NQDC, nonqualified deferred compensation, non-qualified deferred comp, ERISA[/tags]

Savings Clause Now Disregarded in Deferred Comp Plans

Trends come and go in writing plan documents. The hottest trend over the last year, especially for non-qualified deferred compensation plans, has been to include a savings clause when writing plan documents or amendments. David E. Morse, of K & L Gates, in a great summary of the Final 409A Regs, describes savings clauses as language inserted into the plan document “along the lines of, ‘Notwithstanding anything else to the contrary, if we goofed and left something out or incorrectly interpreted the rules of IRC Section 409A, the Section 409A rules trump the plan terms’.

In the Final 409A Regs, the IRS states that savings clauses will be disregarded. In the preamble to the Regs, the Service included this paragraph:

Commentators asked whether a savings clause would be sufficient to ensure compliance with section 409A, where the savings clause provides that each provision of the plan will be interpreted to be consistent with the requirements of section 409A and that any provision of the plan that does not satisfy such requirements will be of no force or effect. The final regualtions provide that for purposes of determining the terms of a plan, general provisions of the plan that purport to nullify noncompliant plan terms, or to supply required specific plan terms, are disregarded. Accordingly, if a plan contains terms that do not meet the requirements of section 409A and these regulations, or fails to contain a plan term necessary to meet the requirements of section 409A and these regulations, the plan will violate the requirements of section 409A and these regulations regardless of whether the plan contains such a savings clause.

Treas. Reg. section 1.409A-1(c)(1), reflecting this language from the preamble, states:

For purposes of determining the terms of a plan, general provisions of the plan that purport to nullify noncompliant plan terms, or to supply any specific plan terms required by this section, section 1.409A-2 or section 1.409A-3, are disregarded.

Of course, the very next paragraph of the preamble states that due to the complex and varied universe of deferred compensation plans, the IRS will not be issuing model amendments at this time.

[tags]Final 409A regulations, 409A, savings clauses, nonqualified deferred compensation, deferred comp, ERISA[/tags]