"Key Employees" and Section 409A

[Guest erisafried]

In applying the 6 month waiting period for deferred comp distributions to "key employees" in public companies, the threshold question is "who is a key employee?" Never mind the fact that a lot of public companies probably aren't all that used to dealing with Section 416, we know that several of the Section 416(i) definitions are based on "compensation" which is ultimately defined in Section 415©(3) (via Section 414(q)(4)) -- rather unhelpfully -- as the participant's compensation for the year. However, Section 1.416.1 Q&A-T21 of the regs helpfully points out that "compensation" is defined in Section 1.415-2(d): the usual wages+non-deductible moving expenses+taxable welfare benefits+NQSO proceeds+amounts subject to an 83(b) election. Not too hard so far.

So the question is: when do you ascertain how much an employee's compensation is? End of the year immediately preceding the year of termination? Year-to-date compensation (i.e., comp for the year of termination)?

Because of the weird effects of using year-to-date compensation (e.g., non-key employee receives a NQDC distribution that transforms him into a key employee who must wait 6 months to receive the distribution that transformed him into a key employee--say that 3 times fast), it has to be year-end compensation from the year immediately preceding the year in which the termination occurs--doesn't it?

Anyone have any bright ideas about this?

[Ron Snyder]

I believe that this is an appropriate issue to address in the plan documents, probably under definition of Key Employee. IMHO, the definition should be based on prior year compensation unless YTD compensation is greater. While such language isn't particularly difficult to draft, it is the worst of both worlds for the executives of public cos.

[TCWalker]

"Good faith" compliance with a reasonable interpretation of Section 409A (2005). And who could doubt that smile?

[Guest cstrong]

I have a follow-up question. When determining a "specified employee" of a publically traded corporation who must wait 6 months to receive a distribution, do Section 416(i)'s aggregation rules (as described in Sec. 1.416-1, T-1) apply? For example, is a person who is an officer of (and employed by) an affilate and who has compensation in excess of $130,000 a "specified employee" as defined in Section 409A(a)(2)(B)(i)?

[Guest jcarlos]

what is the difference between a "key employee" and a "specified individual"?