The NASPP Blog

January 19, 2010

409A Corrections Program

409A Corrections Program for Documentation Errors
Last week, I said that I would blog about the recently announced (in Notice 2010-6) Section 409A corrections program for documentation errors once I figured out how it applies to stock compensation. Well, figuring that out was easier than I thought–it doesn’t. That’s right, under §III.G of the notice, stock rights aren’t eligible for relief under the program.

Under §1-409A-1(b)(5)(i), the term “stock rights” refers to non-qualified stock options and stock appreciation rights. Thus, Notice 2010-6 can’t be relied on to correct discounted stock options or SARS or any other documentation errors related to these arrangements.

Your only §409A relief for discounted stock options and SARs is Notice 2008-113, which establishes a corrections program for operational errors. Under that notice, for options or SARs to be eligible for correction, the grant documentation (either the grant agreement or the plan) must indicate that the exercise price of the option/SAR should be equal to or greater than the FMV at grant. As I mentioned in my January 13, 2009 blog on Notice 2008-113, it is critical that either your plan or grant agreement include language to this effect–if omitted and an option/SAR is inadvertently granted at a discount, there’s no opportunity to correct the error under either Notice 2008-113 or Notice 2010-6.

It’s clear that Notice 2010-6 doesn’t offer any relief for options and SARs, but what about restricted stock units? For me, the term “stock rights” brings to mind any arrangement that gives employees the right to acquire stock, whether they have to pay for it or not. The IRS, however, thinks differently (hmmm, perhaps I’ve hit upon a key reason why I find §409A so hard to understand). §1-409A-1(b)(5)(i) uses the term “stock rights” to refer specifically to NQSOs and SARs, not RSUs. Thus, an RSU program that provides for elective or mandatory deferral of payout, beyond the short-term deferral period, could potentially be eligible for the Notice 2010-6 corrections program. For example, if the RSU plan allowed deferral elections to be made in a manner prohibited under §409A, that problem might be eligible for correction under Notice 2010-6 (emphasis on the word “might”–there are a number of additional conditions that must be met to be eligible for the program).

When an RSU program has been designed to be exempt from Section 409A under the short-term deferral rule, however, the program isn’t eligible for the Notice 2010-6 corrections program. Thus, the more typical RSU program, in which units are paid out upon vesting, probably isn’t eligible for the Notice 2010-6 corrections program.

We’ve posted an alert on Notice 2010-6 that includes several law firm memos that provide excellent and thorough discussions of the corrections program.

Thanks to Art Meyers of Choate Hall & Stewart for helping me sort through how Notice 2010-6 applies to RSUs.

ShareComp 2010
The NASPP is happy to announce its support of ShareComp 2010, a fully virtual conference on stock compensation. NASPP members can attend the event for free using the sponsor pass “naspp”; feel free to share this sponsor code with others at your company.

ShareComp 2010 will be held live on February 23, 2010 and all presentations, documents, and booths will be available on-demand for a year afterwards. Presentations, solutions, and providers will focus on the needs of professionals in executive roles, finance, human resources, compensation, accounting and stock administration positions. Benefits of attending include:

  • 16 hours of live global interactive learning and networking
  • Best practices for designing, implementing and managing stock compensation programs
  • Instructional sessions that will share real-world examples, tactics and lessons learned
  • Facilitated discussion forums with experts and practitioners
  • A searchable library, including presentations, Q&A sessions and booth materials
  • A year of access to the conference center and the materials

To find out more about, visit www.sharecomp2010.com. Register today for this no-risk, high-impact event (be sure to enter sponsor pass “naspp” for free registration). While you are attending the event, we hope you’ll stop by the NASPP booth.

NASPP “To Do” List
We have so much going on here at the NASPP that it can be hard to keep track of it all, so I keep an ongoing “to do” list for you here in my blog. 

-Barbara