Deferred Compensation - HR Issues

The US recently passed new legislation that may greatly affect how corporations compensate their employees.  New §409A creates a great deal of uncertainty concerning a number of very common arrangements that are legitimate mechanisms employers use to compensate and motivate their employees.

The new code section, enacted under the American Jobs Creation Act of 2004 (P.L. 108-357), will not apply to amounts deferred before January 1, 2005, unless such plans were “materially modified” after October 3, 2004.

If at any time during a taxable year a nonqualified deferred compensation plan either fails to meet or operate in accordance with the requirements, the statute states, all compensation deferred under the plan, for the taxable year and all preceding taxable years, shall be includible in gross income for the taxable year. The inclusion would be to the extent the income is not subject to a substantial risk of forfeiture and not previously included in gross income,

Employer plans that may be affected include:
• Stock appreciation rights (including tandem SARs);
• Phantom stock plans;
• Restricted stock;
• Restricted stock units;
• Severance plans;
• Executive severance arrangements;
• Golden parachutes;
• Settlement agreements;
• Discounted stock options; and
• Deferral arrangements under individual employment agreements

Main News section