The deadline for compliance with final Section 409A regulations, scheduled for Dec. 31, 2007, should be extended for a year, according to 92 of the largest law firms in the nation.The new regulations, finalized in April, require deferred-compensation plans to be amended to comply with the Internal Revenue Code.
Regina Olshan, a partner at Skadden Arps LLP in New York, signed a letter requesting the delay to then-acting IRS Commissioner Kevin Brown on behalf of the 92 law firms. She said that the very fact that all the firms agreed to the letter illustrated the necessity for the delay. "On what other issue would you get these 92 law firms to agree?" she asked.
Firms that backed the request include Baker & McKenzie LLP; Cadwalader, Wickersham & Taft LLP; Caplin & Drysdale Chartered; Cravath, Swaine & Moore LLP; Dewey Ballantine LLP; Fulbright & Jaworski LLP; Jones, Day, Milbank, Tweed, Hadley & McCloy LLP; Paul, Weiss, Rifkind, Wharton & Garrison LLP; Shearman & Sterling LLP; Sullivan & Cromwell LLP; White & Case LLP; and Willkie Farr & Gallagher LLP.
"These are large law firms with significant [Employment Retirement Income Security Act] practices, and they're saying that with their sophisticated and well-equipped workforce they can't get this done," observed Becky Miller, a managing director in retirement resources for RSM McGladrey.
Miller noted that the release of the final IRS regulations was later than originally anticipated. "They were promised for June 2006, and they kept delaying them until April 2007, with a compliance deadline of Dec. 31, 2007," she said. "When the hearings were held, a number of speakers said this would take a huge effort and we needed a lot of time to comply. Obviously, that voice wasn't heard."
"When you consider that the lion's share of CPA firms are in the middle market, and the fact that the regs came out during tax season, a lot of CPAs may just have gotten through their stack of mail and it's now dawning on them that there's a problem," she said.
Olshan's letter stated: "It is our collective view that the period until the current deadline is not sufficient to ensure both thorough compliance with Section 409A and appropriate analysis by the taxpayers of the high-level policy issues raised by the required amendments, particularly in light of the corporate governance processes many of our clients have adopted with respect to decision-making related to executive compensation matters."
It continued, "Further, attempted compliance with the deadline is imposing an undue strain on resources and administrative burdens on our clients and their service providers (including attorneys, actuaries, compensation consultants, accountants and record-keepers)."
It is not just big corporations that are affected, according to Olshan. "Nonqualified plans really include every employment agreement in the country, and most of them likely violate these rules," she said.
"Even small businesses routinely enter into employment agreements. Do they know that each of these have to be reviewed by year's end?" she asked. "It's hard to imagine how smaller businesses are handling this, and foreign companies are totally at a loss."
The fact that the penalty for noncompliance is on the employee, rather than the employer, adds to the urgency, she indicated. "The crazy thing is that if there are any mistakes in trying to comply, the penalty is on the employee, who has no way to know that the agreement is noncompliant. That's why it's particularly important to give people more time to comply."
A RUSH JOB
"People are finding the rules more onerous than the IRS anticipated," said Richard Hochman, president of Butler, N.J.-based employee benefits consultants McKay Hochman Co. Inc.
"They seem to take forever to get the guidance out and then impose quick deadlines to comply," he said. "These are not like basic profit-sharing plans that you can draft which are primarily boilerplate. Most of these are individual arrangements which will be time-consuming to draft."
The new requirements even apply to informal arrangements, according to RSM's Miller. "In small businesses and the mid-market, compensation devices are typically less complex," she said. "The devices we know about we might be able to get into compliance. But it's the devices we don't know about that keep us awake at night."
For example, she said, "When a company hires someone away from someone else, they might make a commitment to replace or make up for lost benefits. It might even be an oral agreement, but it would be considered a deferred-compensation arrangement and needs to be in writing. If it's not, the employee will be subject to the 20 percent penalty."
"This typically comes up in mergers and acquisitions," said Miller. "I came across a recent agreement where a deferred-compensation agreement was reflected in a personal letter from the president to a new employee, but it bound the company. Those kinds of things give us all the shudders, and that's the concern with the impending due date, because we can't possibly find all the informal agreements and make the required changes by then."
Edgar Atkins, a partner in the national tax office of Grant Thornton and chair of the American Institute of CPAs' Employee Benefit Technical Resource Panel, agreed. "Businesses haven't gotten their arms around the various arrangements they have that are subject to these rules," he said.
"One of the challenges is that compensation is defined very broadly," he said. "For example, if a company gives a financial planning benefit to one of its executives - say $5,000 a year to get taxes done and for financial advice - if the individual does not use up the allowance this year and can carry it over until next year, that's deferred compensation for purposes of these rules, and it has to comply."
"There hasn't been a lot of activity in this area," he said. "I tell clients that they need to make sure the people in the organization understand how broad this definition is. In many cases, there's no single person in the organization that knows all of the different arrangements they have that might be covered by this."
Olshan's letter noted that many corporate clients have literally hundreds of interrelated deferred-comp arrangements. "These include employment agreements, the severance provisions of each of which must be individually analyzed for Section 409A compliance," it stated.
"We are very concerned that the attempts to accomplish the required analysis, decision-making and amendments in the current compressed time frame are likely to cause mistakes, oversights and errors, even by the most sophisticated advisors and clients who are doing their absolute best to comply," the firms stated. "The consequences of any errors will fall on the individual employees, not the employers, and most of those employees have little or no ability to address or correct those errors."
Miller observed that there is nothing similar to a compliance relief program, as there is for qualified plans. "The frustration with the short deadline is a concern that if you get something wrong, there's no safety net of a compliance relief program. There's no assurance that if you miss something or misunderstand something, there will be room to negotiate relief."
Moreover, she noted, most small and midsized businesses will expect their accountants to handle the matter. "They rarely have relationships with legal counsel who would be doing this," she said. "They may have a general business attorney, but they expect their CPA to help with a Tax Code issue."
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