As the end of 2012 approaches, various compensation-related issues may need to be addressed and corrective action taken before Dec. 31.
Section 409A “Release-Timing” Issues
The IRS’s special transition relief for correcting “release-timing” issues under Section 409A of the Internal Revenue Code (Code) in certain employment, severance and other similar agreements expires on Dec. 31, 2012. Agreements that are not corrected by this deadline could result in significant additional taxes being imposed on employees or other “service providers” who are parties to the agreements. Employers and other “service recipients” should review agreements that condition payments on an employee’s or other service provider’s execution of a release of claims or other similar condition, and, where possible, take any necessary steps before year-end to amend these agreements to comply. In light of the attention that the IRS has given to the release-timing issue, we anticipate that this might be the focus of examination activity in coming years. See our prior article earlier this year for further details.
Acceleration of Compensation into 2012
In anticipation of widely expected increases in income, FICA and long-term capital gains tax rates starting in 2013, many companies are exploring ways to accelerate into 2012 income that would otherwise be recognized in 2013 or later, particularly for executives and other highly compensated employees.
Deferred Compensation Plans Subject to Section 409A
It is crucial that companies exploring acceleration of compensation keep the restrictions of Section 409A in mind. That section generally prohibits acceleration of payments of nonqualified deferred compensation. Therefore, it will generally not be permissible to accelerate the payment of supplemental retirement income that would otherwise be payable after 2012. Moreover, Section 409A may also impact a company’s ability to accelerate the payment of restricted stock units, performance shares, multi-year bonuses or other types of deferred compensation.
Even if it is not possible to accelerate distributions from nonqualified retirement plans, it may be possible to accelerate into 2012 the FICA taxation of benefits under such plans.
Compensation not Subject to Section 409A
Annual bonuses, restricted stock and stock options are among the types of compensation that are generally outside the scope of Section 409A and therefore it may be possible to accelerate the payment, vesting or exercise of such bonuses, stock and options. However, publicly-traded companies that are considering accelerating annual bonus payments or other performance-based compensation first need to examine the effect of any such acceleration under Section 162(m) of the Code, which limits the deduction of non-performance-based compensation to $1 million annually for certain executive officers. Other relevant considerations include shareholder disclosure and, for stock options and the sale of vested stock, insider-trading laws and related company policies.
Qualified Retirement Plans
Tax-qualified retirement plan benefits are also exempt from Section 409A and in some cases it may be possible for participants and beneficiaries to take or commence distributions from such plans in 2012 rather than in 2013 or later.