Steelerfan

Many insurance agents are considered independent contractors, in that case wouldn't the correct reporting be on a 1099-MISC?

HarryO You're exactly right, that's why I'm in favor of placing language in all 409A plans to provide for accelerated distributions in the event of a 409A failure--technically you could be scrwed because there is no $ to withhold from if you couldn't accelerate. [This the reason 409A will obliterate discounted options--because pre-selecting the date of exercise is completely against everything that an option is supposed to be--and if you have to accelerate the exercise of an option you have to violate what you promised the employee in the first place] I was merely attempting to point out that there is no obligation on the employer to withhold the excise portion of the tax (20%+interest) upon a 409A failure. This amount is up to the employee to pay unless an employer chooses to gross up the employee or to go through the ridiculous "fixing" procedure of IRS Ann 2007-18. The announcement fixes nothing and merely allows the employer to pay the excise tax (which it could do anyway) despite the fact that some misdated options may not be in violation of 409A. BTW I realize by "fix" you are probably referring to repricing the option. But if an honestly mispriced outstanding option isn't subject to 409A (as I would posit) you shouldn't have to "fix" or reprice the option or worry about any 409A issue at vesting or later. Of course this analysis cannot work with intentionally backdated or legitimately discounted (in the money) options. [Note the edits in brackets in my above post to clarify what HarryO pointed out] "CowboysFan"--Oh no!!! We use cowboys fans as spare auto parts here in the 'burgh.

It might help to remember that (ignoring 457 concerns) the lapse of a valid substantial risk of forfeiture would never be a taxable event under 409A unless there was a 409A failure. So in the original example the taxable event would occur in the year in which the payment was made or became available and of course not when the vesing schedule lapsed (or when the plan would have been able to payout had the person not been a specified individual). Note that in order to avoid the administrative burden of the special specified individual payout rule, many companies opt to apply the six month rule to everyone.

Note that there is no withholding obligation on the employer for [the excise tax portion of] amounts that must be reported [some day] in box 12 code Z due to 409A failures. The excise tax is really the employee's problem (for which he will ultimately blame the employer who did not know what the heck to do). But even if an employer fails to report an amount that is subject to 409A, only the employee is liable to the IRS for the penalty taxes. [For options that violate 409A and have already been exercised] the employer will report and withhold on the spread at exercise as Form W-2 box 1 wages just as it would have prior to 409A [and eventually additional reporting in box 12 code Z of the amount subject to tax due to 409A failure]. [if an outstanding option is in violation of 409A, the "amount vested" will be taxable and subject to reporting and withholding after '07, but only the employee will be liable for the additional excise taxes] Of course an employee may have recourse against the employer [for the excise tax], but that is really (iin my mind) unclear as of yet

For most purposes it won't matter, but . . . . . . I believe the IRS is taking the position that NQSO that meet the definition in the regulations are merely in compliance with 409A. This will allow them to "go after" accidentally mispriced options as being in violation (e.g options that were accidentally discounted due to a faulty grant). This position is clearly not a certain one, and it has little or no statutory support. My prediction is that when litigated, the courts will decide that nonqualified stock options granted at FMV are exempt from 409A. If that turns out to be the case, then everyone who accidentally mispriced their options due to "not so great" grant procedures or other administrative snafoos (NOT intentional backdaters), and who assume they violated 409A will be sorry if they pay the excise tax under 409A pusuant to the new announcement 2007-18.

I agree with WDIK. See PLR 19991032

I don't know if "encouraged" is the right word, but people seem to refuse to work together and insist that annihilating the competition must be the right way--treating labor as a commodity will never be good for communities as a whole. My grandfather was in the car business since the early 1900's (he died in the '90's) and he saw this as a huge problem in the business community. I don't have the solution, but this aspect of business is what I hate the most, it happened with manufacturing, and we are still trying to figure out how to recover from the loss of that economic base. I mean seriously, if the service jobs go away, what the heck will most people do? But then again, nobody really cares cause it's all about $$$$$$$ Hey I love this country but things have to be done right

Anyone out there who thinks this is a global ecomony should consider whether they could go to india or where ever and become employed if they so desired. They don't have laws protecting against discrimination the way we do in America. Maybe I could agree with outsourcing if laws were equal, but it is being done purely on the greed factor, it is not a level playing field out there and it hurts our economy to do it.

The example in the proposed regs is basically a repricing of the discounted option with an exercise price = FMV on the date of the original grant, as if the option had not been discounted at that time. the way I look it, you get to pretend that the stock was issued on the original grant date at the non-discounted price. But the SEC could look at that and say you issued a new option on the replacement date with a backdated exercise price (i.e. the price the option should have been if, for example, it was granted in 2004. Basically, you want a "pass" from SEC that you can do this, but my feeling is to fix the tax problem and worry about SEC rules later.

Delayed comment here. These types of arrangements are exactly what 409A wants to either eliminate or be forced to comply with the 409A election and timing rules. If you want to get this fancy, then be prepared to deal with all the consequences of having potentially discounted options. Otherwise, how hard is it simply use an exercise price that coincides with the date of grant, which should be the date on which all the material terms of the option apreement are set in stone as long as notice is provided to the grantee within a reasonable period of time. Apparent need of human beings to set an exercise price that is on some date other than the date of the actual grant baffles me and is something that should have been addressed regutorily ages ago to prevent all the abuse that exists today.

Does anyone know where the SEC stands regarding the remedy under 409A to replace discounted options with non-discounted options? It appears that you would be granting a new option that is backdated--is there any SEC exemption for doing this in order to fix a tax problem? Any idea is appreciated.

It sounds like your company wants to do a traditional restriced stock grant. After 409A, this the only sensible thing to do since it is clear that such arrangements by virtue of being subject to 83(b) will be outside the scope of 409A unless the right provides for a further deferral of payment. Try to find a BNA portfolio or some tax law authority describing restricted stock arrangemets.

Thanks, you can do it for anyone up until the end of '06.

Does anyone know where the SEC stands regarding the remedy under 409A to replace discounted options with non-discounted options? It appears that you would be granting a new option that is backdated--is there any SEC exemption for doing this in order to fix a tax problem? Any idea is appreciated.

The advantage to keeping track of grandfathered benefits separately would be to prevent those assets from being subjected to much harsher tax penalties if something were to go wrong. If you voluntarily make the whole plan subject to 409A and the executive find that out, they will go after the company to pay big tax bills if 409A is violated. An extra 20% is applied making it taxable at the top rate of 55%. Your last question doesn't make sense-how can a violation of 409A with respect to amounts subject to 409A taint grandfathered assets unless you specifically decide not to do separate bookkeeping ? 409A does not treat NQDC plans the way 401(a) treats qualified plans that can be disqualified as to all participants (which has never happened anyway). A violation of 409A with respect to the assets suject to 409A affects only the participant not the entire 409A portion of the plan, let alone grandfatered assets.

Thanks Harry O, this is exactly the issue. If the IRS doesn't act, the result would seem to be a bit anomolous in a situation where the CFO must be disclosed in the proxy regardless of the amount of his total comp, but might not be a covered employee under 162(m) by virtue of the fact that a CFO is neither the CEO nor one of the high four as defined under 162(m); then the CFO falls b/w the cracks. I don't think I'll be able to sleep until they fix this one

It seems counterintuitive, but the arrangement described here looks like it could fit under the short-term deferral exception because the amount payable could be made within 2 1/2 months after the taxable year in which the amount is not suject to a SRF. This can happen even if you have a LBR to comp that will be payable in another year. However, any transition relief would be highly preferable becaue even under this excpetion, you are hampered by the need to make the payment election 12 months before the removal of the SRF and cannot receive payment for another five years after that.

Has anyone looked at the effect that the new SEC proxy disclosure rules will have on the determination of who is a "covered employee" for the 162(m) 1 million dollar deduction limit? Specifically, e.g., if a CFO's comp must be disclosed under SEC rules, would he be a "covered employee" under 162(m) even if he is not one of the high four?

Check Q&A 10 of Notice 2005-1 about vesting--you can't roll vesting. Under the origial arrangement described in this thread, the arrangement is not subject to 409A, but can be treated as a deferral of comp. The payment of the stock can be deferred pursuant to the subsequent election rules as described below in the regs: (3) Initial deferral election with respect to short-term deferrals. With respect to a legally binding right to a payment of compensation in a subsequent taxable year that, absent a deferral election, would not be treated as a deferral of compensation pursuant to §1.409A- 1(b)(4), an election to defer such compensation may be made in accordance with the requirements of paragraph (b) of this section, applied as if the amount were a deferral of compensation and the scheduled payment date for the amount were the date the substantial risk of forfeiture lapses. Notwithstanding the requirements of paragraph (b) of this section, such a deferral election may provide that the deferred amounts will be payable upon a change in control event (as defined in §1.409A-3(g)(5)) without regard to the 5-year additional deferral requirement.