The passage of the Coronavirus Aid, Relief, and Economic Security (CARES) Act, as well as general liquidity and business continuity concerns resulting from the financial effects of COVID-19, have created circumstances calling for reductions in executive compensation. However, employers and employees must carefully consider how any reductions are implemented to remain compliant with Internal Revenue Code Section 409A.
In this article, Milliman’s Dominick Pizzano and White & Case’s Henrik Patel and Kenneth Barr review executive compensation issues that should be examined during these turbulent times.
Internal Revenue Code Section 409A contains strict rules limiting the ability of nonqualified deferred compensation plan (NDCP) participants to change their benefit commencement date (BCD) under the plan. These rules provide that, subject to certain exceptions, a change in the BCD will usually constitute an impermissible acceleration of deferral of payments under the NDCP.
In this article, Milliman’s Dominick Pizzano and White & Case’s Henrik Patel and Kenneth Barr examine how NDCP sponsors can navigate the rules to ensure their NDCP comply with Code Section 409A with respect to changes in the form of payment elections.
The Section 409A rules cast a very wide net when it comes to the definition of what constitutes a nonqualified deferred compensation plan (NDCP). Accordingly, employers need to regularly inventory and review their various compensation and benefits agreements in order to determine if any existing or new arrangements are structured in a manner that creates a Section 409A NDCP. This article by Milliman’s Dominick Pizzano highlights points to consider when conducting a Section 409A “to be or not to be” determination process.
This article originally appeared in the Autumn 2019 edition of Benefits Law Journal.
Nonqualified deferred compensation plan (NDCP) sponsors can experience challenges during a merger and acquisition (M&A) due diligence test because of Internal Revenue Code (IRC) Section 409A compliance. However, even if all the NDCPs pass this potential problem, there are still other challenges to solve before this critical examination is completed. Two such questions are “fit” related: (1) will the NDCPs still fit within the top-hat exemption post-merger; and (2) have the NDCPs Federal Insurance Contributions Act (FICA) taxes been properly applied to the benefits? In this article, Milliman’s Dominick Pizzano and White & Case’s Henrik Patel prepare NDCP sponsors to address these two important topics and alert them to any trick questions they may pose.
With merger and acquisition (M&A) momentum showing no signs of slowing down, companies should review their current nonqualified deferred compensation plans (NDCPs) to assess whether such plans can withstand the rigors of an M&A due diligence test, particularly with respect to compliance with Internal Revenue Code Section 409A. For companies in the midst of an M&A process, a careful examination and comparison of each of the respective companies’ NDCPs is recommended prior to closing the deal so that each side knows exactly what they will be getting into (as well as what they will be getting out of the NDCPs) when the change in control occurs. This article by Milliman’s Dominick Pizzano and White & Case’s Henrik Patel provides more perspective.
This blog is part of a 12-part series entitled “The nonqualified deferred compensation plan (NDCP) dirty dozen: An administrative guide to avoiding 12 traps.” To read the introduction to the series, click here.
In the first part of this series, we examined the need to inventory and examine all compensation arrangements in order to ascertain which ones are nonqualified deferred compensation plans (NDCPs) and thus subject to 409A. One of the main reasons that such proactive analysis is strongly recommended is that, chances are, if the employer does not know an arrangement is subject to 409A, the arrangement most likely is not supported by a “409A-compliant document.” So just what constitutes a 409A-compliant document? Well, the 409A rules make it clear that each NDCP must include the following material terms in writing:
• Individuals or group to be covered
• The amount to which the participant has a right to be paid (or in the case of an amount determinable under an objective, nondiscretionary formula, the terms of such formula)
• Time of payment
• Form of payment
If the plan permits a deferral election, such election also must be “documented”―either in the actual plan document or by reference in the plan document to forms that are completed and executed by participants on a timely basis.
Also, the six-month delay rule for any payment triggered by a separation from service of a key employee of a publicly traded company must be stated in the NDCP by the later of either the plan sponsor’s stock becoming publicly traded or the participant becoming a “specified employee” (i.e., generally a “key employee” as determined under the qualified plan top-heavy rules). Accordingly, plan sponsors may wish to include this provision even if their companies are privately held currently so as to avoid a violation in the event that they go public in the future and then neglect to add this information to the document.