Practice Strengths

Executive Compensation: 409A Compliance

For a description of our comprehensive executive compensation services, please click Executive Compensation: Helping Clients Reach Goals.

Link to Baker Hostetler Internal Revenue Code Section 409A Executive Alerts

The IRS and Treasury recently issued new "Section 409A" rules governing deferred compensation plans and potentially affecting countless other forms of compensation. Organizations had until December 31, 2007, to comply with the new rules or be potentially subjected to a 20% penalty tax and substantial interest penalties.

Compensation subject to 409A Compliance Regulations includes:

• stock options
• severance pay
• bonus payments
• restricted stock
• partnership payments
• post-employment fringe benefits
• perquisites

Companies that do not appropriately report Section 409A violations on information returns (such as Form W-2) may be subject to IRS penalties and face Section 404 material weakness disclosure issues.

We strongly recommend that you promptly undertake a review of your plans, contracts and other arrangements to determine whether the new rules apply so you can effect compliance by year-end. Certain organizations may need to negotiate contractual changes, schedule board or compensation committee meetings to consider and approve any needed changes, and for public reporting entities, prepare appropriate disclosure and SEC filings that may be required.

Response to this legislation is best addressed with a coordinated approach. Baker Hostetler's Executive Compensation Practice Team is prepared to review compensation-related plans, contracts and arrangements, identify (and fix, where necessary) those found to be subject to the new rules, and counsel on disclosure and reporting obligations.

As a service to clients and friends of Baker Hostetler, our Executive Compensation team has prepared a series of Alerts explaining specific aspects of 409A Compliance. To view these Alerts, please click here.

Executive Compensation: Helping Clients Reach Goals

We advise and represent clients in all types of executive compensation matters. Understanding that executive compensation is effective only when it furthers the client's strategic objectives, we have helped clients reach their goals in a wide array of situations, including the following:

• The public company that perennially seeks to attract and retain key people to serve as directors, officers and key managers.

• The public company that regularly needs to rotate its key managers among an array of subsidiaries and affiliates, including some situated in foreign countries.

• The privately held company that sought to separate selected key employees from employment, during an ownership transition, without driving them into the arms of a competitor and impairing the company's enterprise value.

• The Internet company that needed to rebuff attempts by a former executive to exercise his stock options.

• The privately held company that needed to offset built-up deferred compensation owed to a departing executive against amounts owed to the company by the executive.

• The tax-exempt institution that sought to retain its executive director because of his unique fund-raising abilities.

• The privately held real estate development company that needed to strategically reposition itself to sell services rather than rent real estate.

• Public and private companies that sought to preserve the enterprise value of their respective businesses during periods of organizational disruption (which have included bankruptcies, and industry wide consolidations) by using employment agreements and long-term equity incentives to “lock up” selected management team members.

• The professional services company that needed to reinforce its collaborative culture through the use of project-based profit-sharing pools controlled by those who participated in the project.

• Public company executives who needed to preserve built-up contract and stock rights, to comply with company-based stock ownership requirements, which were threatened by divorcing spouses.

• Private business owners who found themselves compelled to restructure their businesses in order to monetize the interests of a divorcing spouse without undermining the business's viability or forcing a sale.

• Executives solicited to join other organizations, but unsure of their obligations to their present employers under existing employment covenants.

The list continues to grow.

We use a collaborative approach which matches up our clients' needs with the experience needed to attain their varying goals and objectives. To do so, our executive compensation team reaches out to an array of attorneys whose practices are concentrated in fields such as federal and state income and employment taxation; employment and employment litigation; employee benefits; federal and state securities regulation; intellectual property; domestic relations; private wealth planning; and creditors' rights/bankruptcy. Through this process, we orchestrate solutions to complex—and widely varying—client challenges.