Source: https://www.bakerdonelson.com/Code-167409A-and-Hidden-Deferred-Compensation-10-24-2007
Timestamp: 2019-04-23 12:29:38+00:00

Document:
By now, you are probably aware that all deferred compensation arrangements must be written to comply with §409A. New IRS Notice 2007-86, issued on October 22, generally extends the documentary compliance deadline to the end of 2008. Good faith compliance in the interim is still required. But you might be surprised at the many various arrangements that are considered deferred compensation arrangements requiring compliance with §409A.
Any nonqualified deferred compensation arrangement, such as a SERP, Top Hat Plan or directors’ plan.
The penalties to the executive are severe if the documents are not compliant. Generally, an executive who participates in a deferred compensation arrangement that is subject to §409A is immediately taxed on the value of the deferred compensation, plus the executive will have to pay a 20% excise tax on the amount that is included in income, as well as a penalty. Withholding by the employer is required on the early income inclusion but not on the excise tax or penalty. Discounted stock options that are subject to §409A may, under certain circumstances, be cured by a timely written amendment. Finally, if the executive participates in more than one deferred compensation arrangement, the failure of one arrangement could also cause the other arrangement(s) to fail to comply with §409A.
The potential hidden costs to a buyer include liability for the target company’s failure to satisfy its tax withholding obligations with respect to deferred amounts, possible breach of contract claims for amendments or terminations of benefits where a required consent of the employee was not obtained, and gross-up payments to executives of the target company as a result of the imposition of excise taxes under §409A. For any transactions involving deferred compensation, it will be important to work closely with your employee benefits lawyers to identify the risks of noncompliance with §409A and to reflect those risks properly in the transactional documents.

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