The IRS and Treasury recently issued new “Section 409A” rules governing deferred compensation plans and potentially affecting countless other forms of compensation, including stock options, severance pay, bonus payments, restricted stock, partnership payments, post-employment fringe benefits, and perquisites.
Organizations have until the end of 2007 to comply with the new rules. Individuals covered by plans, contracts and arrangements which are found to be subject to the new rules but do not comply with them after December 31, 2007 will be subjected to a 20% penalty tax and potentially substantial interest penalties, in addition to any income and employment taxes which might apply. Companies that do not appropriately report Section 409A violations on information returns (such as Forms W-2) may be subject to IRS penalties and face Section 404 material weakness disclosure issues.
The Alert found here is one of a series of Baker Hostetler alerts addressing the application of the final regulations to equity incentive plans.
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