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409A – Is Your Compensation Arrangement Subject to These Rules?

The 409A rules do not provide a clear roadmap to determine what compensation arrangements are subject to their regime of requirements and restrictions.  In this brief video, Brian Berglund provides a description of the approach you should take to evaluate whether your compensation arrangement should be structured to comply with the 409A rules regarding deferral elections, timing of payments and other requirements.

(You can also view the video by going here.)

Time to Assess the Independence of Your Compensation Committee’s Outside Counsel and Other Advisers

Among other things, the Dodd-Frank Wall Street Reform and Consumer Protection Act requires a company with securities listed on a national exchange to:

  • Have a compensation committee of independent directors;
  • Provide the committee with authority and funding to retain its own advisers; and
  • Have the committee assess the independence of its advisers (other than in-house counsel) before retaining the adviser or receiving the advice.

As previously announced in our January 29, 2013 client bulletin (available [here]), the NYSE and Nasdaq have adopted rules implementing the Dodd-Frank requirements.

Effective July 1, 2013, under applicable NYSE and Nasdaq rules, the compensation committee is required to consider the independence of its compensation consultant, outside legal counsel and other advisers before selecting or receiving advice from them.  There is no requirement that the committee hire or receive advice from solely independent advisers, only that it consider their independence before selecting or receiving

Eighth Circuit Clarifies the Scope of ERISA’s Application to Severance Arrangements

 The Eighth Circuit’s recent decision in Dakota, Minn. & E. R.R. Corp. v. Schieffer (Schieffer II), No. 12-1807, 2013 WL 1235235 (8th Cir. Mar. 28, 2013), offers new insight into the circumstances under which severance benefits provided under an executive’s employment contract are governed by ERISA.  The opinion clarifies that ERISA does not govern contractual obligations in an executive employment contract that are not provided under an ERISA plan and, even where amount of payments are made by reference to the terms of an ERISA plan, the arrangement does not “relate to” an ERISA plan.   Schieffer concerned a dispute over severance benefits after the employer (“DM&E”) terminated its CEO in anticipation of a merger.  Under the employment agreement, DM&E had agreed to continue providing Schieffer benefits for three years following his severance payment.  These benefits, as described in the employment agreement, included “‘all employee health, welfare and retirement benefits

Reminder: Hurry! Opportunity for Possible Refund of FICA Taxes Ends Soon!

As noted in our blog entry on October 16, 2012, under the Sixth Circuit’s discussion in U.S. v. Quality Stores, severance payments made because of an employee’s involuntary separation resulting from a reduction-in-force or discontinuance of a plant or operation are not subject to FICA taxes.  This holding is contrary to a prior decision of the Federal Circuit Court of Appeals and published IRS guidance.  The government has until May 3 to appeal the case to the Supreme Court.  Until a final decision in this case has been rendered, taxpayers that have made severance payments in 2009 should file a protective claim for a FICA tax refund no later than April 15, 2013.  This protective claim will preserve the taxpayer’s right to a refund should the IRS not appeal the decision or should the decision be upheld on appeal.

 

SEC Releases Letter Clarifying Application of Section 402 of Sarbanes-Oxley Act

Last month the SEC issued a no-action letter to a financial services firm that sheds light on the scope of the prohibition under Section 402 of the Sarbanes-Oxley Act of 2002 which makes it unlawful for an issuer to “extend or maintain credit, to arrange for the extension of credit, or to renew an extension of credit, in the form of a personal loan to or for any director or any executive officer . . . of that issuer.” 

Historically, the SEC appears to have been reluctant to issue formal guidance respecting the parameters of the loan prohibition under Section 402.  Common arrangements left in limbo by this lack of regulatory guidance extend to personal use of company credit cards, personal use of company cars, travel-related advances, and broker-assisted option exercises. 

The SEC’s no-action letter was issued to RingsEnd Partners, a financial services firm.  The letter addresses a program established

How to Support a Deduction for Reasonable Compensation

How to Support a Deduction for Reasonable Compensation

April 3, 2013

Authored by: benefitsbclp

Section 162(a) of the Internal Revenue Code allows as a deduction all the ordinary and necessary expenses paid or incurred during the year in carrying on a trade or business, including “reasonable compensation for personal services actually rendered.”

The reasonableness of compensation is a question of fact.  A taxpayer is entitled to a deduction for salaries or other compensation if the payments were reasonable in amount and are in fact payments purely for services.

Sometimes it is difficult to determine whether amounts are “reasonable,” especially when payments are made to a shareholder-employee or the shareholder’s relatives.

A ruling by the U.S. Tax Court on March 25, 2013, provides a helpful analysis of 10 factors considered by the Court in deciding that amounts deducted as compensation paid to a sole shareholder-employee, his officer-wife, employee-brother and employee-daughter were not reasonable.  (K & K Veterinary Supply, Inc. v. Commissioner, T.C. No.

Recognition of Income on Roll Out of Split-Dollar Arrangement

Originally posted on TrustBryanCave.com by Kathy Sherby & Stephanie Moll

The Tax Court in Neff v. Commissioner, TC Memo 2012-244 (8/27/2012) recently ruled on the income tax consequences of the termination of a split dollar life insurance arrangement (“SDLIA”), in ruling that the payment of a discounted amount by the employees on the termination of the SDLIA resulted in the recognition of income to the employees to the extent of the difference between the amount owed to the corporation under the SDLIA and the amount the employees paid. The Tax Court did not address the issue of the extent the equity portion of a SDLIA may be subject to income taxation on the termination of the SDLIA as that issue was not raised by the Service nor addressed by the Tax Court.

This case involves a pre-final regulation SDLIA to which the final regulations

Executive Compensation – 2012 Year-End Compliance and 2013 Planning

It’s that time of year again!  Time to ensure year-end executive compensation deadlines are satisfied and time to plan ahead for 2013.  Below is a checklist of selected executive compensation topics designed to help employers with this process.

I.       2012 Year-End Compliance and Deadlines

□      Section 409A – Amendment Deadline for Payments Triggered by Date Employee Signs a Release

It is fairly common for an employer to condition eligibility for severance pay on the release of all employment claims by the employee.  Many of these arrangements include impermissible employee discretion in violation of Section 409A of the Internal Revenue Code because the employee can accelerate or delay the receipt of severance pay by deciding when to sign and submit the release.  IRS Notice 2010-6 (as modified by IRS Notice 2010-80), includes transition relief until December 31, 2012 to make corrective amendments to

Proposed Changes to ISS Proxy Voting Policies

On October 16, 2012, Institutional Shareholder Services (ISS) issued for comment several proposed proxy voting policy changes.  The following would affect U.S. public companies:

Board Matters

Current Policy: Recommend vote against or withhold votes from the entire board (except new nominees, who are considered case-by-case) if the board failed to act on a shareholder proposal that received the support of either (i) a majority of shares outstanding in the previous year; or (ii) a majority of shares cast in the last year and one of the two previous years.

Proposed Policy: Recommend votes against or withhold votes from the entire board (with new nominees considered case-by-case) if it fails to act on any proposal that received the support of a majority of shares cast in the previous year.

The proposed change is intended to increase board accountability. ISS is specifically seeking feedback as to whether there are specific circumstances where

Potential Refund Claim for FICA Taxes on Severance Payments Made in a Reduction in Force

On September 7th, 2012, the 6th Circuit upheld the District Court’s decision in U.S. v. Quality Stores, holding that severance payments made to employees in connection with an involuntary reduction in force were not “wages” subject to FICA taxes.  United States v. Quality Stores, Inc. (In re Quality Stores, Inc.), 424 B.R. 237 (W.D. Mich. 2010), aff’d, 10-1563, 2012 U.S. App. LEXIS 18820 (6th Cir. September 7, 2012).   In so holding, the 6th Circuit reasoned that such severance payments were supplemental unemployment compensation benefits (“SUB Pay”) within the meaning of § 3402(o)(2) of the Internal Revenue Code (the “Code”) exempt from FICA taxes.

This holding is directly at odds with the position of the Internal Revenue Service (“IRS”), set forth in Revenue Ruling 90-72, that such severance payments are wages for FICA purposes and not SUB Pay.  According to the IRS, the definition of SUB Pay

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