Everyone is talking and writing about the high-level issues of performance goal setting, equity award timing, option repricing, and share pool problems, so I thought I would talk about some more mundane issues. Today, the Section 409A and non-qualified plan issues, and opportunities to deal with it, being created by COVID-19. Here are five my partner Ruth Wimer and I have encountered.
- Cancellation of non-qualified plan deferrals. Section 409A provides explicitly, that a participant’s deferral election must be irrevocable. However, regulations under 409A allow a participant to cancel his or her deferral elections following an unforeseeable emergency or a hardship distribution. The deferral election must be cancelled, not merely postponed or otherwise delayed.
- Electing an unscheduled distribution. Regulations under Section 409A allow a participant to elect an unscheduled distribution from his or her non-qualified plan accounts due to an unforeseeable emergency that results in a severe financial hardship.
Paying annual bonuses by March 15. In order to qualify for the short-term deferral exception to the onerous requirements of Section 409A, amounts such as annual bonuses generally must be paid no later than March 15 following the year in which they were earned and vested. However, if the plan document or agreement requires payment by March 15, but the actual payment is not made until after that date, generally there will not be a 409A violation as long as the amounts are actually paid by December 31, 2020.
- Scheduled distributions from a non-qualified plan. Under Section 409A, a failure to make distributions according to participants’ elections and the terms of the plan would be a violation. However, regulations under 409A allow certain exceptions for an employer’s inability to pay. Additionally, as noted above, there generally will be no 409A violation as long as the amounts are actually paid by the end of the taxable year.
- Setting performance goals. Section 409A requires that a participant’s election to defer compensation must be made before the start of the year in which the services will be performed. However, in the case of “performance-based compensation,” a participant’s initial deferral election may be made no later than six months before the end of the service period. For example: a deferral election as to 2020 annual bonus payable in early 2021 could be made as late as June 30, 2020. This would also allow the deferral election for such bonus to be changed (g., reduced) prior to that date. Additionally, corporate or individual performance criteria must be established in writing by not later than 90 days after the commencement of the period of service to which the criteria relates. For most companies, that means by March 20, 2020.
One would hope that IRS takes a lenient approach to the application of these rules under the current circumstances.
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