ALERT - DO NOT DELAY REVIEW/REVISION OF DEFERRAL TERMS IN ALL COMPENSATION PLANS

 (The following is an excerpt from an article by Steven J. Friedman, an attorney with Littler Mendelson's New York office that was published by the Society for Human Resource Management. More information is available on line at www.shrm.org)

WHY THE RUSH FOR COMPLIANCE?
Deferred compensation arrangements or all types must be reviewed and likely amended in 2007 in order to comply with Section 409A of the Internal Revenue Code.

In spite of a narrow documentation extension, employers must be in good faith compliance with Section 409A because it took effect January 1, 2005.

WHAT PLANS ARE COVERED?
Any compensation arrangement that provides for the payment of compensation in a year later than the year in which the compensation was earned may be considered a deferred compensation arrangement. This includes not only executive compensation and deferred compensation arrangements but also broad based programs such as annual bonus plans, long term incentive plans, severance plans and arrangements, deferral payments under employment agreements, stay bonuses and agreements that settle law suits.

The fact that compensation may be subject to "substantial risk of forfeiture" will not keep it from being deferred compensation.

AVOIDING BEING OUT OF COMPLIANCE
To avoid the reach of Section 409A, employers may want to act to reserve the right to amend or terminate an arrangement wherever possible.

Avoiding Section 409A will preserve flexibility for employers with respect to pay practices.

WHAT IS REQUIRED BY SECTION 409A?

• Strict definition of the form and timing of the distributions
• Strict deferral election requirements with some special timing rules for initial eligibility and for deferrals of "performance based" compensation.
• Selected other exemptions

WHAT SHOULD BE DONE IN 2007?
Review all employment agreements, bonus plans, stock plans, severance plans and severance and settlement agreements to inventory all "deferred compensation" arrangements. Determine which of these arrangements are subject to Section 409A rules.

Any arrangements that are not in compliance should be amended immediately to insure compliance.