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New Wrinkles in Deferred Comp Rules

May 8, 2008
Related Topics: Benefit Design and Communication, Featured Article
With proxy season behind them, financially savvy HR executives may think they have some time to take a break from executive compensation matters. But lawyers and compensation consultants warn that companies need to remember they have yet another deadline approaching: By December 31, companies must comply with the not-so-new deferred compensation rules.

Congress originally passed Sec-tion 409A of the Internal Revenue Code in the wake of the Enron scandal. The goal of the rules is to prevent executives from withdrawing money from their deferred compensation when their companies are in trouble.

Even though Section 409A has been around in one form or another for the past four years, the final rules were issued by the Internal Revenue Service late last year.

While most companies have been working to comply with Section 409A since it was proposed four years ago, the final rules presented a few changes that companies should check up on, experts say.

"There were enough changes so that some companies may not be in compliance anymore," says Mark Poerio, a partner in the Washington office of law firm Paul Hastings, who says he has one client that found this to be the case.

Noncompliance could result in a 20 percent tax with interest, not to mention other penalties, experts say.

A piece of good news is that the final rules specify what kinds of plans fall under Section 409A. That will be helpful to companies, says David Wax, a principal at Buck Consultants. For example, the final rules clarified that when a plan pays out to an executive who has resigned "for good reason," the plan can treat that payment as severance under Section 409A. That wasn’t clear under the proposed rules.

It’s up to HR to make sure that all of the parties involved in deferred compensation understand what needs to be done and are prepared to meet the deadline for compliance, Poerio says.

"HR needs to work with legal and compensation committee members as well as with the executives affected," he says. "The action plan has to be more than just updating documents."

HR also needs to make sure that the companies’ payroll systems are coded properly so that these executives don’t receive these payments until they want them, says Mike Shah, an attorney in the New York office of Jones Day.

This means that HR executives should consult with each of the executives affected to make sure they understand the implications, he says. This might take no small effort, considering how complicated the new rules are, experts say.

"This is the most technical and difficult piece of legislation on executive compensation to come out in a long, long time," says Don Lindner, executive compensation practice leader for WorldatWork. "HR needs to make sure they have the right resources to address this."

Workforce Management, May 5, 2008, p. 24 -- Subscribe Now!

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