Deadline Approaching For Compensation Elections Under JOBS Act

by Glen Shapiro, LawAndTax-News.com, New York

21 June 2005

Elections under deferral arrangements involving performance-based compensation for US employees should be made before the end of the month according to Section 409A of the JOBS Act passed last year.

The deferred-compensation provisions in Section 409A, responding to scandals such as Enron in which executives took advantage of vague tax law, were tacked onto last November's American Jobs Creation Act, and they apply to numerous types of compensation, including supplemental executive retirement plans, or SERPs, stock options with a discounted exercise price, stock-appreciation rights, restricted stock units and certain severance plans.

The rules affecting performance-based compensation require a deferral election to be made not less than six months before satisfaction of the performance criteria. For arrangements on which the performance condition may be met by the end of 2005, the deferral election should be made on or before June 30, 2005.

Some other types of election were due in by 31st March 2005. But a number of companies are said to be getting round the intent of the legislation simply by guaranteeing executives that they won't be financially harmed by the new rules, which are said to be complex and difficult to interpret in many situaitons. Plans which fall foul of the legislation are subject to a 20% excise tax, plus interest.

The Treasury has so far released only one guidance note on the new rules, which is far from comprehensive. "There's the statute and one piece of IRS guidance and a bunch of geeky tax lawyers talking to each other and trying to parse congressional intent," said Arthur Meyers, co-chair of the employee benefit and executive compensation group at Palmer & Dodge LLP in Boston to the Wall Street Journal. "It could very well be that counsel to companies and to executives are saying that, 'If we guess wrong, you are completely protected.' "

In fact, the Treasury rushed out its guidance only because Congress directed the Secretary of the Treasury to issue guidance regarding the termination and amendment of certain non-qualified deferred compensation arrangements and to define a change in ownership or control for purposes of Section 409A, within 60 days and 90 days respectively of enactment of the legislation.

The guidance included a decision to exempt stock appreciation rights from the new rules if they are settled in stock at fair market value, something which was broadly welcomed by businesses.

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