Sweet Child O’Mine – Business Transition with Benefits

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By Kevin Selzer

Owners of closely held businesses, particularly first-generation owners, often have a difficult time finding a suitable succession plan. These owners are faced not only with phasing out of their labor of love, but choosing a new direction for the thing they created. That new direction often starts by looking at third party investors and buyers, which may consist of competitors or private equity. If the owners find the third-party market undesirable, they may seek out alternatives. Our blog post today looks at three “internal” succession alternatives that owners may want to consider, particularly those that are driven by a desire to preserve legacy and/or protect the workforce, including existing management. Read more

Deferred Compensation Arrangements for Non-Profits: What I’ve Felt, What I’ve Known, Is Not Consistent with the Code

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by Benjamin Gibbons

Deferred compensation options for executives of tax-exempt entities are often misunderstood by those organizations who have not previously delved into them. Traditional tax-exempt organizations – think charities and non-profits – are subject not only to the deferred compensation rules of Section 409A of the tax code, but also Section 457 (though note that Section 457 does not apply to deferred compensation arrangements of churches). Section 457-subject organizations without deferred compensation experience are often under the impression that they are able to establish deferred compensation arrangements that are similar to those of for-profit entities, in that the right to deferred compensation can vest now and be taxed at a later date. When such organizations begin moving forward to put a deferred compensation arrangement place, they are often surprised to learn that Section 457 generally limits their ability do so.

The most analogous deferred compensation arrangement for tax-exempt executives compared to a traditional for-profit deferred compensation plan is what’s generally known as a Section 457(f) plan. While there are a number of differences between a Section 457(f) plan and a for-profit deferred compensation plan, the biggest is the timing of the taxation of the deferred compensation. A for-profit deferred compensation plan can be designed so that once the right to deferred compensation vests, it can be taxed (for income tax purposes) on the date that it is paid, which can be many years in the future. With a Section 457(f) plan, once the deferred compensation vests, it becomes immediately taxable, even if the plan provides for payment of the deferred compensation in a future year. Read more

With a Little Help From My Friends … New Clawback Rule Requires Coordination of Finance, Securities, HR, and Benefits Personnel

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by Elizabeth Nedrow

Many aspects of benefits and executive compensation require coordination between a company’s benefits, HR, finance and securities compliance personnel. One topic currently responsible for many such “all hands” planning sessions is the SEC’s new clawback rule. This rule has been a long time in the making, and the final compliance deadline of December 1, 2023 is now fast approaching.

In 2010, the passage of the Dodd-Frank Wall Street Reform and Consumer Protection Act required the SEC and U.S. securities exchanges to require listed companies to implement clawback policies. After delays, proposed rules and other preliminary actions, in October 2022 the SEC issued its final rule (called “Rule 10D-1”) laying out the requirements for clawback policies. The NYSE and Nasdaq followed up by developing listing standards in line with Rule 10D-1. The SEC approved those listing standards on June 9, 2023. Public companies now have their marching orders – the rules are effective October 2, 2023 and listed companies must have clawback policies in place no later than December 1, 2023. Read more

Crazy Little Thing Called . . . Automatic Enrollment

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by Leslie Thomson

Secure Act 2.0 requires certain plans to automatically enroll participants once they become eligible to participate. Plans that were established prior to December 29, 2022 are exempt from this new requirement. Plans that are established after December 29, 2022 are subject to the automatic enrollment requirement but not until the 2025 plan year. Read more

Can’t Stop the AI*

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by Benjamin Gibbons

Today’s Benefits Dial post was written in part by a special guest author, ChatGPT. With all of the buzz surrounding AI chatbots, I decided to see how ChatGPT would do composing a blog post on a somewhat technical but fairly common executive compensation scenario. As discussed below, the results were not so good. Here is our guest author’s blog on the ability to make subsequent deferral elections in a nonqualified deferred compensation plan:

Making a Section 409A subsequent deferral election can be a complex process, but it is an important step for individuals who have previously deferred compensation under a nonqualified deferred compensation plan. The subsequent deferral election allows these individuals to change the timing of their future payments, providing greater flexibility and control over their income streams.

To make a subsequent deferral election under Section 409A, an individual must first meet certain eligibility requirements. Specifically, the individual must have originally deferred compensation under a nonqualified deferred compensation plan that complies with Section 409A, and the election must be made at least 12 months before the original payment date. Once eligibility is established, the individual must submit a written election to the plan administrator outlining the new deferral election terms.

It is important to note that making a subsequent deferral election is not a decision to be taken lightly. There may be significant tax consequences associated with a change in payment timing, and it is important to consult with a tax professional before making any changes to a nonqualified deferred compensation plan. In addition, the plan document may contain specific rules and procedures for making a subsequent deferral election, and failure to follow these rules could result in adverse tax consequences.

In summary, a subsequent deferral election under Section 409A can provide valuable flexibility for individuals who have previously deferred compensation under a nonqualified deferred compensation plan. However, it is important to carefully consider the tax implications and procedural requirements before making any changes to a plan. For more information on making a subsequent deferral election, consult with a benefits attorney or tax professional.

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It Doesn’t Have To Be That Way: Negotiating Good Service Provider Agreements Is More Important than Ever

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by Bret F. Busacker

It may be an understatement to say that compliance with benefit plan laws and regulations is becoming increasingly more complicated. In my experience, the COVID era has brought about some of the widest-sweeping changes on the burden of administering benefit plans in some time.

There has been major evolution around service provider fee disclosure, DOL reporting and disclosure on mental health parity and disclosure of plan costs, new claims procedure rights, expanded expectations around Cyber Security protections, and expansion of the use of ESG and crypto currency (and on-again, off-again regulatory efforts). Read more

Oh Won’t You Stay…Until the Bonus is Paid

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by Brenda Berg

A new interpretation by the Colorado Department of Labor and Employment (CDLE) could have significant tax impacts under Internal Revenue Code Section 409A (409A). Many bonus and incentive programs require that the intended recipient remain employed with the employer through the date of payment. If the employee quits before the payment date, the employee is not entitled to receive the bonus. In fact, many bonuses are granted specifically in order to retain the employee.

In Interpretative Notice and Formal Opinion (INFO) #17, the CDLE interprets the Colorado Wage Act as prohibiting an employer from requiring the employee be employed on a certain date in order to receive a bonus, if all other conditions to receive the bonus have been met. See my colleague’s article here for more discussion about the new guidance in general.

If the CDLE interpretation is applied to retention bonuses, the bonuses might not, in fact, be forfeitable if the employee quits before the payment date. Since these bonuses are typically designed to be exempt from 409A tax rules under the “short term deferral” exception which requires there to be a “substantial risk of forfeiture,” this could mean that there is no longer a substantial risk of forfeiture. The amount could be considered deferred compensation that is subject to 409A – and all of 409A’s restrictions and an extra 20% tax for any violation. Earlier “vesting” and disregard of “substantial risk of forfeiture” could have other tax and accounting impacts as well, including the timing of federal/state income taxation and FICA taxation, and which taxable year is allocated the company deduction under the “all-events test” for liabilities. Read more

You Can’t Touch That: Permitting Cashouts of PTO May Create Tax Traps for Employees and Employers

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by Bret F. Busacker

As we approach year end, employers should give some thought to reviewing their PTO policies for the coming year. One of the most common tax traps that we see is employers offering employees the right to cash out their PTO.

“It’s their PTO, and if they have accumulated a large balance, then we want to encourage them to get the large PTO accrual off the books,” is a common explanation we hear from employers.

Not so fast. Giving an employee a choice between current cash and rolling over PTO hours accelerates the taxation of the employee’s PTO hours (even if the employee never elects to cash them out). Many employers are surprised to learn that an obscure IRS rule known as “constructive receipt” generally requires an employer to treat PTO as taxable wages at the earliest time the employee is able to elect to cash out the PTO. Read more

B-Side – Dual Status Issues with Partnership LTI

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By Kevin Selzer

Long term incentive plans offered by an entity that is taxed as a partnership present an additional problem compared to their corporate A-side counterparts.  If an employee is given an equity interest in the partnership, the individual will generally no longer be considered an employee for tax purposes.  Instead, that individual is considered a partner in a partnership, will receive a K-1 for future pay (rather than a W-2), must pay estimated taxes, becomes ineligible for certain benefits, etc.  This dual status issue is generally nonexistent within corporate entities – indeed, it is commonplace for employees to also be shareholders, perhaps as a result of a traditional restricted stock or option grant. Read more

The Music of the Night . . . Phantom Plans for Early Stage Companies

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By Kevin Selzer

Early stage companies that are strapped for cash often turn to long-term incentive compensation plans to attract and retain key employees and service providers. Many of these companies opt to put in place arrangements that grant actual equity interests (e.g., stock options or, in partnership-taxed entity, profits interests).  While these arrangements may be a good match for certain companies and situations, I find that phantom plans often fit better with early stage company/ownership goals. Read more