The Long and Winding Road… of 401(k) plan compensation definitions

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by Ben Gibbons

A plan’s definition of “compensation” tends to be one of the trickier aspects of 401(k) administration.  Having been asked multiple times in the past 12-months whether deferrals to a nonqualified deferred compensation plan need to be deducted before determining eligible compensation for 401(k) deferrals (spoiler: they do), it seems a blog post on the subject is in order.

The vast majority of 401(k) plan documents define compensation by starting with one of the following base definitions: W-2 (Box 1) compensation; Section 3401(a) compensation; or Section 415 compensation (the specifics of these base definitions are beyond the scope of this post).  Each definition has its nuances with respect to whether certain types of compensation should be either included or excluded from the base definition (e.g., fringe benefits or amounts realized from the exercise of stock options).

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[Don’t] Tell Me Lies, Tell Me Sweet Little Lies … or the SEC will charge you with fraud

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by John Ludlum

Many private companies assume that if valid federal and state exemptions from registration are available for private company securities that there is little risk of problems with the Securities Exchange Commission (SEC).  While it is rare for the SEC to take an interest in private company transactions, many SEC Rules apply to private company securities and transactions.

In one example, Stiefel Labs (Company) maintained an Employee Stock Bonus Plan (Plan) with Company contributions funded, at least in part, by shares of Company stock.  As a private company, repurchases by the Company were the only way for employees to receive liquid funds for their shares.  The Company engaged independent accountants to perform fiscal year end valuations and made this valuation information available to Plan participants and used this value for repurchases for the next year. 

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Sitting On a Dock of the Bay, watching my post-termination exercise period, roll away

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Tax considerations for modifying stock options to extend the post-termination exercise period

by John Ludlum

We are often asked by our private company clients about making changes to outstanding stock options.  In some cases, changes to the number of shares subject to an option are needed, or to the vesting schedule, or to the allowed payment forms for exercising the option.  The rules affecting these decisions come from several, primarily tax, authorities, and the implications to the option and the company are quite varied depending on the change being made. 

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Walk this way…to avoid the pitfalls of ERISA

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by John Ludlum

Companies implement bonus plans to meet a variety of business objectives:  retention, specific company business goals, change of control, and others.  In designing bonus plans, there are a variety of legal fields that must be understood for exemption or compliance including securities, tax, ERISA, and employment.  Many times, bonus plans that pay only in cash for achieving specific corporate objectives and which require services through the date of payment are exempt from onerous compliance mandates; however, if a bonus plan is found to provide retirement income or “results in a deferral of income by employees for periods extending to the termination of covered employment or beyond,” then that arrangement may be found to be a “pension plan” under ERISA Section 3(2) (29 U.S.C. § 1002(2)(A)).  Once a bonus plan is subject to ERISA, it must comply with ERISA’s annual reporting, participant communications, funding, participation, vesting, and fiduciary duty requirements. 

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She works hard for the money, so you’d better … help her afford to buy company stock

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by Beth Nedrow and Kevin Selzer

Employee Stock Purchase Plans (ESPPs) are a program offered by many companies (particularly those with publicly traded stock) as a way for all of their employees to buy company stock. In their most robust format, employees can buy stock at a discount. You’d think employees would jump at the chance to capitalize on this immediate value opportunity. Not so! Employee participation rates are typically fairly low (often below 50%). Employers who offer ESPPs strive for ways to engage employees to appreciate and participate in this valuable benefit. Those employers may be interested to hear that a startup company is making headlines for its product aimed at boosting ESPP participation.

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