AJCA "Specified Employee" Determination

[Guest benefitsdude6]

Under the AJCA, "Specified Employees" of publicly traded companies cannot receive distributions for 6 months after seperation from service. "Specified Employees" are Key Employees under 416. In determining "officers" under 416, should a plan disregard or foreign employees (e.g. nonresident aliens receiving no US source income)?

Help is appreciated.

[Guest Harry O]

Key employees are determined on a controlled group basis which includes foreign members of the group. Consider yourself in luck if your 50 highest-paid officers are all non-US residents working outside the US for foreign affiliates.

[Just Me]

And, keeping in mind that the 6-month rule only applies to publicly-traded companies, exactly what is "publicly traded" for this purpose? Note that § 409A says that the rule applies to key employees of "a corporation any stock in which is publicly traded on an established securities exchange or otherwise."

So -

If the plan sponsor is a wholly-owned subsidiary of a foreign parent that is publicly traded somewhere like London or Tokyo - does the rule apply; and

Does anybody have an idea what "or otherwise" means? This is a very scary term in how broad it seems.

-----------------------------------------------

But that's *Just Me*

[JanetM]

Harry O, you you have a cite for me on that? You said we consider all employees, regardless of location, in the control group when determining top 50. Can you point me where it says that?

[Guest Harry O]

See 409A(d)(6) which applies the aggregation rules of 414(b) and © to the new deferred comp rules of 409A. See the top-heavy regs for the same rules under 416 (Reg. 1.416-1, T-20). The only time the aggregation rules don't apply is to determine whether an individual is a key employee by virtue of owning a certain percentage of the employer. In that case, each company is treated separately.

[Kirk Maldonado]

Just Me:

I don't think that Nasdaq is technically a "stock exchange."

[mbozek]

Kirk: Are you saying that Microsoft is not a publicly traded company because it is listed on the NASD?

[Kirk Maldonado]

No.

[JanetM]

Am a bit confused. Our control group tests US plans on QSOB basis. Since we test that way we wouldn't include the foreign employees when figuring out the top 50 - right?

This is too much for my brain today. Can someone help? We are UK company with about 80% of employees in US.

[Guest Harry O]

QSLOB is for nondiscrimination/minimum coverage purposes only. You don't determine your key employees or your HCEs on a QSLOB basis. For example, if you elected the top-20% HCE method, you determine your HCEs on a controlled group basis first and then allocate your HCEs to each QSLOB. You don't take the top 20% of each QSLOB.

Same theory for the key employee definition. You need to aggregate all of your companies, including US and UK, and then figure out the 50 highest paid officers. If all of your high-paid officers work back in the UK, you won't have anyone in the US subject to the 6-month distribution delay for key employees.

[Just Me]

Kirk -

I don't think that Nasdaq is technically a "stock exchange."

I worked for a company traded on pink sheets, which is a step down from even the NASDAQ, and it was considered publicly traded for securities regulation purposes...but that being said, §409A says "or otherwise" so I'm inclined to err on the side of requiring Key Employees to wait 6 months under the terms of the plan so there is no risk of blowing the deferred compensation requirements.

And, in keeping with the foreign theme of this thread, if the parent is traded on something like the Tokyo exchange or the London exchange, would the U.S. sub be subject to the 6-month rule? I'm thinking "yes."

----------------------------------

But that's *Just Me*

[mbozek]

The Securities Act of 1933 requires the registration of securities which are publically offered by a company. The Securities Exchange Act of 1934 requires registration of securities issued by any company prior to having its securities listed on a US exchange or the over the counter market (Nasdaq). Foreign co which are listed only on a foreign exchange, e.g. London, Frankfort are not publicy traded under US securities law. There are two ways in which publicly offered securities can be traded in the US. First through the 8 national securities exchanges: NYSE, AMEX, Boston, Phila, Pacific, Chicago, CBOE and Cincy. Second, through the Nasdaq (the over the counter market) which is an affiliation of dealers who agree to act as market makers with each other, by being willing to purchase or sell a security in a normal lot to other dealers at a quoted ask or bid price. According to the Conference Report the restriction on distributions is limited to key employees of publicly traded companies.

[Guest DMK]

But neither the law nor the conference report explicitly limits the provision to publicly traded corporations in the US, correct? If the IRS wants to cast a wide net (which it may well do, since it generally has disfavored nonqualified deferred compensation), it seems the provision could apply to foreign subsidiaries. For example, the rules under 280G require aggregation of all companies, including foreign corporations.

[Kirk Maldonado]

Just Me:

I think that the "pink sheets" are part of Nasdaq. But they aren't part of the National Market System of Nasdaq ("NMS"). NMS is the highest level of Nasdaq. Pink Sheets are a lower tier.

By the way, they formally stopped used "NASDAQ (in all capitals) a number of years ago.

[mbozek]

huh? I dont think there is a comparable definition under the US securities laws to foreign companies which are not traded on a US exchange or nasdq as publicly traded in foreign markets since US laws do not regulate such companies. If Congress wanted to require a delay in deferred comp issued under foreign companies it could have done so by adopting the controlled group definition of IRC 414(b) instead of the publicly traded company definition. The reason for exempting foreign companies from the 6 month provision is that they are not subject to US securities laws so there is no possibility that executives could receive payments from an insolvent corporation before the company's assets could be seized by US creditors under US laws.

[Just Me]

If Congress wanted to require a delay in deferred comp issued under foreign companies it could have done so by adopting the controlled group definition of IRC 414(b) instead of the publicly traded company definition.

All I'm seeing in 409A is "...a corporation any stock in which is publicly traded on an established securities market or otherwise." Where is this definition you refer to?

JM