The Advisors' Blog

With the 409A documentary compliance deadline fast approaching (December 31, 2008), companies are under the gun to complete the arduous process of identifying and analyzing all arrangements (written and unwritten) that might possibly entail “deferred compensation” as expansively defined under Section 409A. There are many rocks to look under! Don’t overlook some of the less obvious sources, such as:

– informal offer letters to employees that may promise severance pay, equity grants or accelerations, post-termination health insurance, continuation of other employee benefits, or reimbursements of various types

– “informal” bonus arrangements that may need to be reduced to writing and contain a payment deadline to assure the availability of the short-term deferral exemption

– stock unit awards or performance shares (as opposed to restricted stock grants), which are not categorically exempt from 409A but can often be drafted to comply with 409A or meet the short-term deferral exemption

– reimbursement arrangements, which turn up in all types of unexpected contexts – such as, to list just a few: (a) an agreement to reimburse the expenses of an employee for cooperating with the company after employment as to lingering litigation matters, (b) agreements to reimburse legal expenses incurred by an employee in seeking to enforce an agreement with the company, or (c) even a monthly car allowance or payment of club dues

– (to get a bit more exotic) reverse back-to-back payment triggers for compensation to employees of hedge fund managers (i.e., where the hedge fund manager, as service provider to the hedge fund, gets paid upon termination of the hedge fund and uses that event as a trigger to make payments of deferred compensation to the employees of the hedge fund manager). This is the inverse of the “back-to-back arrangements” that are explicitly permitted (if drafted correctly) under Treas. Reg. §1.409A-3(i)(6).

The best time to start the 409A documentation process is several months ago. The second best time is TODAY. Remember that even after you identify the documentary “fixes” needed to comply with or be exempt from 409A, you must leave time to:

– organize the whole story for presentation to the Board or Compensation Committee for consideration and approval where required

– explain the ramifications of 409A to employees who have contractual arrangements that are implicated and outline any choices such person may have (such as whether or not to agree to a change in the “good reason” definition in order to avoid a six-month delay in payment)

– allow service providers to consult their own counsel for advice, where they are being asked to consent to changes to an agreement.

The one-year reprieve we got last October doesn’t seem as long as it once did.

– Laura Thatcher, Alston & Bird