I was recently talking with a friend of mine who also operates and administers an SMBE, and I just happened to mention IRS Section 409 to him while talking about an independent stock option valuation we did last year. He was familiar with the issues around stock option pricing, but less so about potential implications on things like bonus plans and severance agreements, both of which affect him personally.
This is by no means intended as tax advice, but IRS Section 409(a) regulations were just finalized, and the section significantly changes the way non-qualified deferred compensation plans are treated for income tax purposes. I’m not aware of any specific carve-outs for small businesses or entrepreneurs (please enlighten me if you know of any), so we all need to pay attention to them. I found a nice resource discussing 409(a) from Goodwin Proctor. The rules appear to be complex but relatively manageable. The key is that the IRS has instituted a deadline of December 31, 2007 to make sure that all affected plans are in compliance.
I also wanted to pass along a couple of employment agreements which either generically or specifically refer to IRS Section 409(a). I accessed these documents from the thousands of employment agreements and compensation plans available online at RealDealDocs.com.
The first agreement was evidently drafted by Morgan Lewis & Bockius, LLP and Taylor Colicchio & Silverman, LLP, and it is an employment agreement between Pharmanet and its CFO. It has several specific references to 409(a) provisions with regard to severance payments and the like.
The second is an employment agreement filed with the SEC a couple of months ago by Argo Group International Holdings and its President / CEO. FYI, the company is organized under Bermuda law, but I liked the generic carve-out to allow payments to be accelerated to avoid applicability of 409(a).
It’s tough to stay on top of all these issues, and it highlights the importance of having access to appropriate accounting and other professional resources. The challenge, as always, is to do it cost effectively.
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