Nonqualified deferred compensation plans may be valuable and useful compensation tools for both privately held and publicly traded employers and for tax-exempt organizations. The attorneys in the Executive Compensation practice group assist these employers with all aspects of compensation planning, including employment and severance agreements, nonqualified deferred compensation plans, supplemental executive pensions, section 415 excess plans, stock option and performance plans, stock appreciation rights, discounted stock options and stock bonus plans. The value of nonqualified deferred compensation plans and the benefits to be gained from such plans make nonqualified deferred compensation plans, equity-based compensation plans and supplemental retirement plans very attractive to employers and key employees. Benefits of these plans include the ability to attract and retain key employees, to provide additional retirement benefits for key employees, and to achieve organizational or individual objectives.

The attorneys in the Executive Compensation practice group work closely with employers to design and implement nonqualified deferred compensation plans that meet the needs and requirements of the employers to attract, retain and motivate their valued employees and that comply with the complex rules and regulations of federal and state securities laws, the Internal Revenue Code (IRC) and the Employee Retirement Income Security Act of 1974 (ERISA). The design and implementation of these plans require careful planning and careful analysis of new income tax requirements following the enactment of IRC § 409A of the Code. This section has dramatically changed the tax rules applicable to nonqualified deferred compensation, principally by broadly defining deferred compensation, establishing deadlines by which deferral elections must be made, regulating distribution practices, regulating funding vehicles and creating substantial adverse tax consequences for the failure to comply with those requirements.

The design of these plans does not end with the analysis of § 409A. Section 409A adds to the existing laws governing the taxation of nonqualified deferred compensation. Prior law regarding transfers of property in connection with the performance of services (IRC § 83) and constructive receipt (IRC § 451 ) continues to apply. In addition, the timing and amount of deductions associated with nonqualified deferred compensation governed by IRC § 83(h), 162(a) and 404(a)(5) have not been changed by § 409A. Compliance with these laws also requires the attorneys to work closely with agencies that enforce these laws and regulate these plans, such as the Treasury Department, the Internal Revenue Service, the Department of Labor and the Securities and Exchange Commission.

A representative list of the nonqualified deferred compensation and equity arrangements we have designed and implemented include:

• Stock option arrangements
• Discounted stock option arrangements
• Stock appreciation rights arrangements
• Phantom equity arrangements
• Many forms of complex nonqualified deferred compensation plans
• § 457(b) plans
• §  457(f) plans
• Long-term incentive arrangements
• Incentive plans that include equity components and company matching components, rabbi trusts and secular trusts.

By way of illustration, for a large closely held corporation, we designed and implemented a stock appreciation rights (SAR) plan to replace a plan under which executives were required to purchase stock if they wished to participate in the increase in value of the business. The SAR plan permitted the company to grant appreciation rights units; it also provided for covered employees to “purchase” appreciation rights units using their year-end bonuses. When the company was later sold, we assisted the company in terminating the SAR plan and paying the employees the substantial benefits that had accrued under the plan.