News

"A general legal advice memorandum (GLAM) published by the IRS in December 2022, AM 2022-007 , threatens to expand application of section 409A to deferred compensation payments for businesses engaged in commerce that provides services to a wide array of unrelated clients or customers. Before the GLAM, those businesses were believed to be exempt from section 409A."

"For private companies, ESPPs may pose unique challenges under securities laws. Although Rule 701 of the Securities Act of 1933 provides a registration exemption for compensation plans of private or non-reporting companies, blue sky laws vary among states regarding the requirements that a private company must meet in order to offer its securities to an employee."

"The compensation at issue relates to Merrill Lynch's WealthChoice Contingent Award Plan, which holds a portion of each advisor's commissions for eight years, called the 'vesting period.'... Milligan contends that WealthChoice is an employee benefit pension plan, per ERISA, and not a bonus incentive plan that can be forfeited subject to managers' discretion. The firm disagrees.... The charges are similar to others filed by advisors who moved firms, and may be part of a growing trend." [Milligan v. Merrill Lynch, Pierce, Fenner & Smith, Inc., No. 24-0440 (W.D. N.C. complaint filed Apr. 30, 2024)]

"The case centers on the wirehouse's various vesting and payout rules. At attorney for the plaintiffs says the bigger goal is to change industry perspectives on 'golden handcuffs.'... A key ruling from November 2023 determined that Morgan Stanley's deferred compensation arrangement should indeed be subject to the anti-forfeiture rules and requirements of [ERISA]. It also determined that the advisor-plaintiffs must arbitrate their 'anti-clawback' claims on an individual basis." [ Shafer v. Morgan Stanley , No. 20-11047 (S.D.N.Y. Nov. 21, 2023)]

"If an employer realizes that it has not filed a Top Hat Statement when required, it may correct this failure using the DOL's Delinquent Filer Voluntary Compliance Program (DFVC Program).... [T]he employer must submit the late filing and a $750 user fee ... The $750 user fee applies regardless of the number of plans or the degree of lateness."

"A recent Delaware Supreme Court decision ... looks favorably on such forfeiture for competition provisions. But other states, especially California, continue to pass laws that create legal risks when incorporating restrictive covenants into compensation arrangements. And the FTC proposed (but has not yet adopted) a nationwide ban on many noncompetes. [This] article explores these recent developments and suggests steps employers should consider when incorporating restrictive covenants into their SERPs or other deferred compensation plans."

"[1] Compensation income ... [2] Stock sales: capital gain or loss ... [3] Cost basis of company stock sales ... [4] Alternative Minimum Tax (AMT) ... [5] Equity comp income left off W-2 ... [6] Estimated taxes ... [7] IRS Form 1099-NEC for nonemployees."

23 pages, rev. Mar. 20, 2024. " Issues that arise when examining NQDC include the timing of income inclusion for the employee or service provider, the timing of the deduction for the employer or service recipient, and when deferred amounts are subject to employment taxes."

"Requiring HCEs to defer only to the NQDC plan makes it possible for the 401(k) plan to meet its testing requirements while preserving HCEs' ability to defer salary and receive a matching contribution. If HCEs are allowed to defer to both the 401(k) plan and the NQDC plan, deferrals into the NQDC plan can help offset income taxes attributable to any required refunds from the 401(k) plan. Employers can implement NQDC plans without the financial burden of having to make additional contributions to a 401(k) plan."

"[W]hile retaining employees remains a top goal of the NQDC plan by more than half of respondents, 'helping employees accumulate assets' jumped to the second most common plan goal, cited by 61.2 percent of respondents and up from 43.5 percent the year before. This goal shift is coupled with an increased percentage of companies [providing] NQDC plan specific education and an increased percentage of companies including that education as part of a comprehensive financial wellness program."

"While there are a number of differences between a Section 457(f) plan and a for-profit deferred compensation plan, the biggest is the timing of the taxation of the deferred compensation. A for-profit deferred compensation plan can be designed so that once the right to deferred compensation vests, it can be taxed (for income tax purposes) on the date that it is paid, which can be many years in the future. With a Section 457(f) plan, once the deferred compensation vests, it becomes immediately taxable, even if the plan provides for payment of the deferred compensation in a future year."

"For employee benefit plans governed by ERISA, there is case law precedent for the proposition that ERISA preempts California law prohibiting enforcement of non-competes in an ERISA covered plan.... [F]or so called 'top hat' plans, non-compete provisions are not rare and in the past have at least arguably been enforceable.... [B]ecause the new law is based on the same statute as before, there is at least an argument that the same analysis will apply. "

"[A] federal judge granted Morgan Stanley's request to force a group of former Morgan Stanley advisors suing the company over deferred compensation to take their claims to private arbitration. However, in that same order, the judge found that Morgan Stanley's deferred compensation programs are governed by ERISA ... Morgan Stanley [has asked] the judge to reconsider his ruling." [ Shafer v. Morgan Stanley , No. 20-11047 (S.D.N.Y. Nov. 21, 2023)]

"If in 2023 an employee exercised an ISO, the Employer must provide the employee with a written information statement by January 31, 2024. Form 3921 should be used for this purpose ... If in 2023 legal title to stock purchased under an ESPP was transferred from the employee to a third party, and such transfer was the first transfer of such shares, the employer must provide the employee with a written information statement by January 31, 2024."

"While they are potentially powerful savings vehicles for highly compensated clients, deferred compensation arrangements are also complex from an operational and tax management perspective.... Getting the job right requires a lot of learning for advisors looking to expand their services in this arena ... These insights can help advisors as their clients either set up or benefit from nonqualified deferred compensation plan arrangements."

"This practice note explains the application of Internal Revenue Code Section 457A, which restricts the ability of certain tax-indifferent entities (so-called nonqualified entities) to defer compensation for services provided by their service providers. It provides guidance on practical steps for attorneys advising such entities on nonqualified deferred compensation plans."

20 pages. "This practice note sets out important legal and tax considerations when developing executive compensation arrangements for tax-exempt organizations, including new excise tax rules enacted under 2017 tax reform legislation. It provides guidance on practical steps for attorneys advising their tax-exempt clients on various aspects of executive total compensation packages, including deferred compensation, incentive compensation, severance, vacation, and fringe benefits."

11 pages. "This practice note discusses the concept of substantial risk of forfeiture (SRF) under sections 83, 409A, 457(f), 457A, 3121(v)(2), and 4960 of the Internal Revenue Code and the different consequences of the failure to achieve a SRF under each such section. SRF is the standard that the [Code] and Treasury Regulations apply to determine when an employee's or an independent contractor's deferred compensation vests, and therefore may be includable in income for the individual (or deductible for the employer or other controlled group member granting the compensation)."

"Although generally excluded from Form W-2 reporting, the U.S. Internal Revenue Code requires that separate information returns be furnished to most U.S. taxpayers who exercised ISOs during 2023 (an 'optionee') or who transferred shares during 2023 that were acquired under an ESPP (a 'transferor').... The deadline for furnishing Forms 3921 and 3922 to optionees and transferors is January 31, 2024. The deadline for filing Forms 3921 and 3922 with the IRS is February 28, 2024,"

"Follow your plan documents ... Avoid accelerating payment ... Carefully consider new deferred compensation ... Value the awards properly."

"The Fifth Circuit affirmed the district court's decision, holding that [1] the collection of a contractually predetermined fixed fee does not constitute a fiduciary act under ERISA; [2] VALIC was not a 'party in interest' when it entered into the Plan's annuity contract; [and] [3] VALIC's collection of the contract's surrender fee does not constitute a separate transaction[.]" [ D.L. Markham DDS, MSD, Inc. 401(K) Plan v. Variable Annuity Life Ins. Co. , No. 22-20540 (5th Cir. Dec. 14, 2023)]

"[This checklist] summarizes what you need for comprehensive year-end and year-start planning with stock compensation and company stock holdings."

"A cybersecurity breach affecting the U.S.-based division of ... Infosys BPM Ltd., shut down some national providers of nonqualified compensation plans and insurance providers starting November 2. At least some of those accounts are fixed and back online now[.]"

"Publicly traded companies generally file registration statements on Form S-8 to register the offering of the company’s stock pursuant to the company’s equity incentive plans under the Securities Act of 1933 ... This same filing requirement applies under certain circumstances to a company’s nonqualified deferred compensation plans. .... Companies may also consider whether an exemption from Securities Act registration is available ... [S]uch analysis will be highly fact-specific and the exemption could be lost if the eligible group changes over time."

"A cybersecurity breach affecting thousands of nonqualified compensation accounts is being resolved, but participant accounts remain days away from updates and coming back online."