ith 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
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