AALU’s Educational Webinar Series Presents Section 409A: What Your Clients May be Missing Featuring Michael Goldstein, JD, LLM, Marla Aspinwall,JD and Stuart Lewis, JD September 17, 2008

Michael Goldstein, JD, LLM Member AALU's Nonqualified Plans Committee Newport Group – Headquartered in Orlando, FL Senior VP & Counsel

Marla Aspinwall, JD Member AALU's Nonqualified Plans Committee Loeb & Loeb, LLP - Los Angeles, CA Executive compensation and benefits attorney

Stuart Lewis, JD AALU Counsel since 1973 Buchanan Ingersoll PC Chair, Tax Section Specializes in 409A, nonqualified and qualified plans

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Are there any further efforts to extend the effective date for 409A? Previous extension took joint effort of 92 law firms Not this time January 1, 2009 = drop dead date

When can we expect additional 409A guidance and what will it address? Additional guidance is guaranteed—maybe It will only address penalties/taxes/corrections We should also have additional guidance re reporting requirements 457(f) guidance expected this year or next PLRs – not likely

What other types of arrangements, besides traditional deferred compensation arrangements are subject to 409A? Bonuses and Performance Payments Commissions, Participation and Royalty Payments Employment Agreements Severance and Change in Control Arrangements Equity Plans and Agreements Reimbursement Arrangements Split Dollar Life Insurance Arrangements

Explain how the Short Payment Period can assist our clients Payments excluded from 409A- If the payment must be OR actually is made within Short Term Payment Period 2½ months after later of end of calendar year or fiscal year of service recipient in which payments not subject to “substantial risk of forfeiture” In days – maximum in 74 days ( =74) New Definition of Substantial Risk of Forfeiture: Subject to continued service or substantial condition related to services or employers business activities or goals (e.g. earnings, equity value, IPO) Ignore non-compete requirements Ignore delays in vesting after services performed

What red flags should we look for in employment agreements? Specify timing of all payments Avoid deferred compensation plans couched in employment contracts Review bonus, performance and contingent payment rights Review severance and change in control provisions Review equity rights Review tax-gross-up provisions Include boilerplate compliance provision, but take additional measures to ensure compliance

What should we look for in Bonus Payment Plans- Are Retention Bonus Plans and Participation Agreements a problem? No problem if specify payment within Short Term Payments Period after vesting If payment delayed or deferrable, comply with all 409A requirements Generally easy to pay within Short Term Payment Period if subject to service requirements If vest on conditions other than service such as employer earnings application of Section 409A less certain – not clear what conditions will be treated as “substantial” Commissions and renewal commissions earned and vested when paid

Will our clients experience any problems with Severance Pay Plans? Severance provisions may be in Employment Contracts or separate Plans Biggest issue is 6-month delay for payments to specified employees of public entities Involuntary severance exception for 2 x final comp up to $460,000 (2008). Can use Short Term Payment exception but careful of “good reasons” terminations--can equal early vesting Continued benefits over up to 2 years or COBRA payments generally work Adding a release can hold you up under 409A

How are Equity Agreements Impacted by 409A? Restricted Stock not covered if included in income on grant or vesting Incentive Stock Options exempted Nonqualified Stock Options and SARs must meet specified conditions: Exercise price must equal at least FMV on grant date Stock of employer or 50% parent (not subsidiary) Only common stock No dividend equivalent rights tied to option No deferral features Modification = new grant – must be at new FMV Deferred Stock subject to 409A like deferred promise to pay cash Phantom Stock = Deferred compensation and must meet 409A requirements Partnership Interests – For now treated like stock but more complicated

In light of the issues raised in 409A will our clients need to review existing Split Dollar Arrangements? New Split Dollar arrangements generally not covered during employment: Collateral assignment loan structure not covered if no promise to forgive loans Non-equity endorsement structure not covered if no promise to transfer policy or cash values in the future Non-equity collateral assignment not generally covered However, promises to fund split dollar arrangements post- retirement may be covered

In light of the issues raised in 409A will our clients need to review existing Split Dollar Arrangements? Old Split Dollar: Application unclear Can be amended if necessary to comply without disturbing grandfathering under Split Dollar regulations.

What approaches are you using with your clients to emphasize the need to do something by December 31, 2008? Send out repeated general mailings alerting clients to compliance deadline Drawing clients attention to deadline in discussions on other projects Include specific notice in every final communication on project this year Review client files for known arrangements needing review

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