We are just weeks away from the last chance for companies to rely on the transitional relief provided under IRS Notice 2008-113. I hope that your company has already taken action to complete a thorough review of compensation arrangements to identify and correct any arrangements that do not comply with Section 409A. Although it might be too late administratively to make major changes to correct errors under the transition relief, it is still a good idea for stock plan managers to do a final review and confirm that corrective action has been taken, especially when it comes to discounted options or SARS.

Background

Section 409A provides for significant adverse tax consequences to individuals whose compensation arrangements are considered to be a non-qualified deferral of income. Such non-compliant arrangements include certain RSU deferrals, change-in-control or retirement arrangements, and exercises of options or SARS with an exercise price that is less than the FMV at grant. For more information on the types of plans and agreements that are considered non-qualified deferred compensation, go to our Section 409A Portal. Although the tax penalties (and interest if the correction is not made after two years) are imposed on the individual rather than the company, employers must now withhold and report appropriately.

Corrections Program

IRS Notice 2008-113 details corrections programs for plans or arrangements that unintentionally fail to comply operationally with Section 409A, including options or SARs that are unintentionally granted at a discount price. For more information on IRS Notice 2008-113, see our alert, 409A Corrections Program for Discounted Stock Options.

These corrections programs are available for operational errors on an ongoing basis; the special deadline that we are approaching now is the for the transitional relief provided by the Notice. This transitional relief allows errors for arrangements pertaining to non-insiders that occurred between 2005 and 2007 to qualify for the corrections program in section VII of the Notice. Under this method, if the correction is made by the end of the tax year immediately following the year in which the error occurred, then the individual will not be subject to the tax and interest penalties associated with the 409A violation.

In addition to the transitional relief deadline, December 31, 2009 is also the deadline for companies to make correction to errors for arrangements pertaining to non-insiders that occurred in 2008 and for arrangements pertaining to insiders that occurred in 2009.
For more information on the 2009 deadline, see our 409A Corrections Must Be Completed By Year-End alert.

Vote for Broc and Dave!

Broc Romanek and David Lynn’s blog on TheCorporateCounsel.net was selected by the ABA Journal as one of the Top 100 Legal Blawgs (I don’t know why they can’t spell “blog”; it must be a lawyer thing). This is quite an honor, but we’re hoping for even more. Readers can vote on their favorite blogs and we want Broc and Dave to win in the “Practice Specific” category. Broc has a lifelong goal of winning a beauty contest and I guess he figures this is as close as he’ll get.

Anyone can vote, you don’t have to be a member of the ABA, you just need to complete the free registration on the ABA Journal website. If you read and enjoy Broc and Dave’s blog–or even if you don’t–I hope you’ll vote for it and help Broc achieve one of his life goals!

If you’ve never checked out the blog; it’s definitely worth a read. Unlike the lazy folks here at NASPP Blog, Broc and Dave manage to post an entry every day. And it’s free to anyone, whether you subscribe to TheCorporateCounsel.net or not. At a minimum, someone in your legal department should be reading it.

-Rachel