FOR LIVE PROGRAM ONLY Mastering New Section 409A and 457(f) Deferred Compensation Rules: Calculating and Reporting Includible Amounts TUESDAY , AUGUST 23, 2016, 1:00-2:50 pm Eastern IMPORTANT INFORMATION FOR THE LIVE PROGRAM This program is approved for 2 CPE credit hours . To earn credit you must: • Participate in the program on your own computer connection (no sharing) – if you need to register additional people, please call customer service at 1-800-926-7926 x10 (or 404-881-1141 x10). Strafford accepts American Express, Visa, MasterCard, Discover . Listen on-line via your computer speakers. • • Respond to five prompts during the program plus a single verification code . You will have to write down only the final verification code on the attestation form, which will be emailed to registered attendees. To earn full credit, you must remain connected for the entire program. • WHO TO CONTACT DURING THE LIVE EVENT For Additional Registrations : -Call Strafford Customer Service 1-800-926-7926 x10 (or 404-881-1141 x10) For Assistance During the Live Program : -On the web, use the chat box at the bottom left of the screen If you get disconnected during the program, you can simply log in using your original instructions and PIN.
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Mastering New Section 409A and 457(f) Deferred Compensation Rules Aug. 23, 2016 Alexander Clark, Partner Barry L. Salkin, Of Counsel Norton Rose Fulbright US, Dallas The Wagner Law Group, Boston alexander.clark@nortonrosefulbright.com bsalkin@wagnerlawgroup.com Allison Hoeinghaus, Senior Director Alvarez & Marsal Taxand, Dallas ahoeinghaus@alvarezandmarsal.com
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MASTERING NEW SECTION 409A AND 457(F) DEFERRED COMPENSATION RULES Calculating and Reporting Includible Amounts August 23, 2016
PRESENTERS 6 Barry Salkin • The Wagner Law Group • Of Counsel Alexander Clark • Norton Rose Fulbright • Partner Allison Hoeinghaus • Alvarez & Marsal Taxand, LLC • Senior Director
7 INTRODUCTION
8 SECTION 409A Overview Enacted as part of the American Jobs Creation Act of 2004 Effective for Adds interest at amounts deferred underpayment in tax years after rate +1% 2004 Section 409A Imposes 20% Applies to any “deferral of Additional Tax on compensation” Service Provider for violations unless exempted Failures included in gross income as soon as no longer subject to a substantial risk of forfeiture
9 SECTION 457 Overview Applies to state & local governments as well as tax- exempt entities Ineligible Plans: Similar concepts Amounts as under Section included in gross 409A, but with income when several major vested even if not differences yet paid Section 457 Eligible Plans: Ineligible Plans: Plans that do not Must satisfy meet certain 457(b) requirements or requirements amounts are over including $18,000 the limit cap (for 2016) Eligible Plans: Amounts aren’t taxable until they are paid
10 OVERVIEW OF SECTION 409A
SECTION 409A OVERVIEW 11 Arrangements Subject to Section 409A Account Balance Plans Excess Defined Contribution Plan Traditional Deferred Compensation Plan Non-Account Balance Plans SERPs Excess Defined Benefit Plans Severance Plans (some of them, anyway…) Other Types of Plans That May Give Rise to Deferred Compensation Below FMV Stock Options Stock Options with Deferral Features RSUs/Phantom Share Plans Dividend Equivalent Rights Section 457(f) Plans Certain Provisions in Executive Agreements
SECTION 409A OVERVIEW 12 Deferral Elections Deferral Elections must be made prior to the beginning of the calendar year in which the compensation will be earned – Exceptions for first year of participation and performance-based payments Elections as to payment form and timing MUST be made at the time of the deferral election Distribution restrictions — limited to 6 events: – Separation from service, death, Disability, Change in Control, designated date or fixed schedule, Unforeseeable Emergency Acceleration is NOT permitted (with very limited exceptions) Elections to delay distributions cannot be effective for 12 months, and must delay the payment by at least 5 years from when the distribution would have otherwise been made 12-Month Restricted Period Permissible 5-Year Required Delay Period Last Day for Payment Dates Subsequent Deferral Election -Y1 Y0 Y1 Y2 Y3 Y4 Y5 Original Scheduled Distribution Date
SECTION 409A OVERVIEW 13 Substantial Risk of Forfeiture Defined Compensation is subject to a substantial risk of forfeiture if: – Entitlement to the amount is conditioned on the performance of substantial future services by any person or – The occurrence of a condition related to a purpose of the compensation, and – The possibility of forfeiture is substantial. Purpose of the Compensation: – A condition related to a purpose of the compensation must relate to the service provider's performance for the service recipient or the service recipient's business activities or organizational goals » For example, the attainment of a prescribed level of earnings or equity value or completion of an initial public offering. An amount is not subject to a substantial risk of forfeiture merely because the right to the amount is conditioned, directly or indirectly, upon the refraining from the performance of services. – For example, a covenant not to compete is not considered a substantial risk of forfeiture under Section 409A.
SECTION 409A OVERVIEW 14 Exception – Short-Term Deferral The Short-Term Deferral Exception takes many arrangements that would otherwise be deferred compensation out of the Section 409A definition. – Payment must be made no later than 2.5 months following the later of the end of the employee or employer’s tax year in which the payment is no longer subject to a substantial risk of forfeiture. – Example: STI/bonus payments that are earned in one year and paid early in the following year. Note that a payment that would otherwise be a short-term deferral, that is not paid within the ST deferral period, will become subject to Section 409A. However, if the plan specifies a payment date within the ST deferral period and the date is missed, the plan will still comply with Section 409A if the payment is made within the same tax year. Practice Note : It’s best if the plan specifies a payment date within the ST deferral period, as that provides more flexibility if the payment date is missed
SECTION 409A OVERVIEW 15 Exception – Severance Pay If Severance Pay is treated as “vested,” then Section 409A may apply. – Ex. An employee’s ability to “walk” within a certain time following a CIC— in that case, the severance pay would be treated as vested and subject to Section 409A if termination of service could occur in a subsequent year. – Termination must be “involuntary” to prevent vesting. » Involuntary termination “without cause” » Voluntary termination for “good reason,” where the threshold is significant (e.g., substantial reduction in salary or duties). • There is a “safe harbor” in the regulations for good reason • If there is a good reason termination provision, need to analyze in light of the safe harbor provisions to see if it would prevent severance pay from becoming vested for 409A purposes. o Must include notice and cure provisions
SECTION 409A OVERVIEW 16 Exception – Severance Pay (cont’d) Separation Pay Exceptions: – Short-Term Deferral » Ex. Severance payable immediately in a lump sum following involuntary separation from service – Collectively bargained separation pay plans – Limited payments of severance payable only upon involuntary separation from service » No more than 2x average annual compensation (up to 401(a)(17) limit in effect for year of separation) • $265,000 for 2016 • Paid no later than the end of the 2 nd taxable year following the taxable year of the separation – Payments less than the limit under Code Section 402(g)(1)(B) » $18,000 for 2016
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