A Second Chance to get it Right. Deferred Compensation Relief Expires December 31, 2010

I made a public service announcement to the folks at my seminar this morning at the South Metro Denver Chamber of Commerce annual Business Expo. The least I can do is share the PSA with you, even if a post detailing my seminar topic---using non-qualified incentive plans to create value by aligning key employees with owner objectives (it's more interesting than it sounds)—is beyond the time I have available for blogging today.

The PSA was directed at companies and employees that already have nonqualified plans in place and concerns Section 409A of the Internal Revenue Code. My message was: ACT NOW—the IRS is giving you a second chance, and how often does that happen?

Section 409A was enacted a few years ago to stem perceived abuses in non-qualified deferred compensation (a classic example of the Pig Rule in taxes—pigs get fat, hogs get slaughtered). Existing deferred compensation plans were given time to fix their 409A issues by 2009. Well, 409A can get pretty tricky, so early this year the IRS issued Notice 2010-6 to allow noncompliant plans to get into compliance, retroactive to January 1, 2009. You just need to make the fixes by December 31, 2010.

The consequences of not making a fix include the employee being taxed on his or her deferred benefits immediately (potentially years early), an extra 20% income tax on top of that (just because), and applicable state income taxes and interest charges. If you knew you were facing that, you would see your lawyer and fix it, right? Now you know, so, like I said, ACT NOW.

Well, maybe you don’t know, because maybe you don’t even realize you have a plan that must be 409A compliant. Here’s a partial list of the types of arrangements (regardless if they are a plan that covers a group or an agreement that covers one person) that may well have a problem. If you have one of these and you haven’t seen your lawyer, ACT NOW.

Deferred Compensation plans

Supplemental Executive Retirement plans

Restricted Stock agreements

Phantom Equity plans

Stock Appreciation Rights

Stock Options

Bonus plans

Separation or Change of Control Agreements

Severance Agreements

Employment Agreements containing any feature of the above

For those of you that have bothered to read this far even though you don’t have an existing deferred compensation plan, and likely don’t know what the heck I’m talking about, bless you. Taxes are a necessary part of any discussion of nonqualified employee incentives—timing (now or later), nature (ordinary or capital) and amount (what’s the value of the incentive). I hope to soon post on the more interesting parts of key employee incentives—identifying owner goals and designing cash and/or equity plans to motivate your employees to get you there.