AALUs Educational Webinar Series Presents Section 409 A

AALU’s Educational Webinar Series Presents Section 409 A: What Your Clients May be Missing Featuring Michael Goldstein, JD, LLM, Marla Aspinwall, JD and Stuart Lewis, JD September 17, 2008

Michael Goldstein, JD, LLM • Member AALU's Nonqualified Plans Committee • Newport Group – Headquartered in Orlando, FL • Senior VP & Counsel

Marla Aspinwall, JD • Member AALU's Nonqualified Plans Committee • Loeb & Loeb, LLP Los Angeles, CA • Executive compensation and benefits attorney

Stuart Lewis, JD • AALU Counsel since 1973 • Buchanan Ingersoll PC Chair, Tax Section • Specializes in 409 A, nonqualified and qualified plans

Technical Problems If you are experiencing any technical problems, press *, zero and wait for operator assistance.

Are there any further efforts to extend the effective date for 409 A? • Previous extension took joint effort of 92 law firms • Not this time • January 1, 2009 = drop dead date

When can we expect additional 409 A guidance and what will it address? • Additional guidance is guaranteed—maybe • It will only address penalties/taxes/corrections • We should also have additional guidance re reporting requirements • 457(f) guidance expected this year or next • PLRs – not likely

What other types of arrangements, besides traditional deferred compensation arrangements are subject to 409 A? • Bonuses and Performance Payments • Commissions, Participation and Royalty Payments • Employment Agreements • Severance and Change in Control Arrangements • Equity Plans and Agreements • Reimbursement Arrangements • Split Dollar Life Insurance Arrangements

Explain how the Short Payment Period can assist our clients • Payments excluded from 409 A- If the payment must be OR actually is made within Short Term Payment Period • 2½ months after later of end of calendar year or fiscal year of service recipient in which payments not subject to “substantial risk of forfeiture” • In days – maximum in 74 days (31+28+15=74) • New Definition of Substantial Risk of Forfeiture: • Subject to continued service or substantial condition related to services or employers business activities or goals (e. g. earnings, equity value, IPO) • Ignore non-compete requirements • Ignore delays in vesting after services performed

What red flags should we look for in employment agreements? • Specify timing of all payments • Avoid deferred compensation plans couched in employment contracts • Review bonus, performance and contingent payment rights • Review severance and change in control provisions • Review equity rights • Review tax-gross-up provisions • Include boilerplate compliance provision, but take additional measures to ensure compliance

What should we look for in Bonus Payment Plans- Are Retention Bonus Plans and Participation Agreements a problem? • No problem if specify payment within Short Term Payments Period after vesting • If payment delayed or deferrable, comply with all 409 A requirements • Generally easy to pay within Short Term Payment Period if subject to service requirements • If vest on conditions other than service such as employer earnings application of Section 409 A less certain – not clear what conditions will be treated as “substantial” • Commissions and renewal commissions earned and vested when paid

Will our clients experience any problems with Severance Pay Plans? • Severance provisions may be in Employment Contracts or separate Plans • Biggest issue is 6 -month delay for payments to specified employees of public entities • Involuntary severance exception for 2 x final comp up to $460, 000 (2008). • Can use Short Term Payment exception but careful of “good reasons” terminations--can equal early vesting • Continued benefits over up to 2 years or COBRA payments generally work • Adding a release can hold you up under 409 A

How are Equity Agreements Impacted by 409 A? • Restricted Stock not covered if included in income on grant or vesting • Incentive Stock Options exempted • Nonqualified Stock Options and SARs must meet specified conditions: • • • Exercise price must equal at least FMV on grant date Stock of employer or 50% parent (not subsidiary) Only common stock No dividend equivalent rights tied to option No deferral features Modification = new grant – must be at new FMV • Deferred Stock subject to 409 A like deferred promise to pay cash • Phantom Stock = Deferred compensation and must meet 409 A requirements • Partnership Interests – For now treated like stock but more complicated

In light of the issues raised in 409 A will our clients need to review existing Split Dollar Arrangements? New Split Dollar arrangements generally not covered during employment: • Collateral assignment loan structure not covered if no promise to forgive loans • Non-equity endorsement structure not covered if no promise to transfer policy or cash values in the future • Non-equity collateral assignment not generally covered • However, promises to fund split dollar arrangements postretirement may be covered

In light of the issues raised in 409 A will our clients need to review existing Split Dollar Arrangements? Old Split Dollar: • Application unclear • Can be amended if necessary to comply without disturbing grandfathering under Split Dollar regulations.

What approaches are you using with your clients to emphasize the need to do something by December 31, 2008? • Send out repeated general mailings alerting clients to compliance deadline • Drawing clients attention to deadline in discussions on other projects • Include specific notice in every final communication on project this year • Review client files for known arrangements needing review

Questions/Comments

Survey Slide