theworkplace.biz
ANOTHER 409A EXTENSION.
The IRS blinks, and everyone "wins."
George L. Chimento
October 22, 2007
Is anyone surprised?
The IRS conceded to reality today. For all practical purposes, it has granted a full
extension until January 1, 2009 of the major requirements of IRC Section 409A.
Plan documents do not have to be executed until December 31, 2008. Plan
operations can be based on good faith compliance and need not follow the April 10
final regulations until January 1, 2009. Executives have more time to consider
their choices. The deadline to commit to a definite time and method of paying 409A
deferrals --- the transition procedure --- has been moved to December 31, 2008.
Until 2009, employers may use good faith efforts to comply; they may rely on the
"final" regulations and Notice 2005-1, and common sense for matters not
addressed by those two sources. After 2007, the proposed 2005 regulations may
not be used except in limited instances.
Is anyone happy?
As a lawyer representing clients who want to comply with the law, of course I'm
"happy." My purported joy is shared by the ABA Tax Section, and a potpourri of
white shoe law firms and big industry groups. The system we compensation
lawyers work under does not encourage us to be philosophers. We are supposed
to help clients comply with whatever Congress and the Agencies dream up in their
collective wisdom.
However, as an American citizen, I want to vent just a bit about 409A and the
millions it has cost our businesses. This money could have been better spent in
improving the competitive position of US industry. The 409A debacle is a microcosm
of a tax system gone rotten.
I'm not happy
It would be foolish not to want extra time to comply. After all, we are dealing with
a law that, since its 2004 infancy, has been analyzed and parsed as if it were
Talmud, including Notice 2005-1, September 2005 proposed regulations, and a 397
page "final" regulations effort, that was clarified twice after the April, 2007
promulgation, and then extended in a miscalculated half effort, just two months
before the current full extension.
My clients took the deadlines seriously, invested the time, have documents in
place, and would like to go on to other matters. A one year extension, frankly, will
just encourage more wheel spinning in Washington. Young lawyers who hop
between private firms and Treasury are making a career out of a single section of
the Internal Revenue Code, meant to cure a minor abuse. I doubt that any elected
member of Congress is actually reading the fine print or appreciates the waste of
brains and money which their staffs have spawned, and which the Administration's
bureaucrats are nurturing. Section 409A, like much of the tax-oriented regulation
of our benefits system, is not a sexy enough issue for any powerful elected person
to call for a halt to it all. So the wheels spin on. No one dares challenge new tax
laws labeled as "reforms." No one is looking at the big picture.
Was 409A really necessary?
In the shell game that passes for a National budget process, 409A was falsely
represented in 2004 as a future revenue raiser to offset current cuts in corporate
tax rates. It was also trumpeted as a great reform of Enron-type abuses, and as a
means to prevent executives in troubled companies from accelerating their
deferred compensation payments while investors and employees were left as
bag-holders.
The tax math is flawed, of course. An executive who defers taxable compensation
pays no current taxes, but his employer also gets no current deduction. Deferred
compensation does not really "cost" the Treasury anything. As for Enron, it got so
much publicity because it was a rare instance. Those portions of 409A which deal
with Enron abuses could have been easily implemented anyway: (1) no offshore
trusts or springing rabbi trusts, (2) mandatory 6 month delay on payments to key
employees, and (3) elimination of haircut provisions.
All of the rest of 409A has been made unnecessarily complex. For example, was it
really necessary for regulations to require advance (at the time of deferral)
elections as to when and how to pay money for the separate events of death,
disability, and change in control? The statute simply said that those were events
when payments could be permitted. Why 75 days to pay short term deferrals and
90 days for separation from service payments? Can the complexities of the
installment payment rules be mentioned in polite company? And where are the
rules to tell employers how to quantify all of this on W-2's, or how to administer
409A in a partnership?
How do companies comply when the government can't finish rules in more than
three years? Too much intellect, and not enough wisdom, has made this whole
process as silly as that which surrounded the ill-fated Section 89. Old hands
recall that Congress finally repealed Section 89, but not before industry had
invested millions in a multi-year regulatory and compliance effort which is chillingly
similar to the 409A process today.
Oh well. I guess I should be of good cheer that we have an extension. Still, why
do I have a sinking feeling that next year promises even more complexity and
expense to my clients? And why do I feel, when politicians pander and coo about
tax simplification, that they don't really mean it?
__________________________________________________________________
This article is provided as a courtesy and may not be relied upon as legal advice, or to
avoid taxes and penalties. Distribution to promote, market, or recommend any
arrangement or investment to avoid or evade taxes, including penalties, is expressly
forbidden. Any communication with the author as to its contents, does not, of itself,
create a lawyer-client relationship. Under the ethical rules applicable to lawyers in
some jurisdictions, this may be considered advertising.
theworkplace.biz
ANOTHER 409A EXTENSION.
The IRS blinks, and everyone "wins."
George L. Chimento
October 22, 2007
Is anyone surprised?
The IRS conceded to reality today. For all practical purposes, it has granted a full
extension until January 1, 2009 of the major requirements of IRC Section 409A.
Plan documents do not have to be executed until December 31, 2008. Plan
operations can be based on good faith compliance and need not follow the April 10
final regulations until January 1, 2009. Executives have more time to consider
their choices. The deadline to commit to a definite time and method of paying 409A
deferrals --- the transition procedure --- has been moved to December 31, 2008.
Until 2009, employers may use good faith efforts to comply; they may rely on the
"final" regulations and Notice 2005-1, and common sense for matters not
addressed by those two sources. After 2007, the proposed 2005 regulations may
not be used except in limited instances.
Is anyone happy?
As a lawyer representing clients who want to comply with the law, of course I'm
"happy." My purported joy is shared by the ABA Tax Section, and a potpourri of
white shoe law firms and big industry groups. The system we compensation
lawyers work under does not encourage us to be philosophers. We are supposed
to help clients comply with whatever Congress and the Agencies dream up in their
collective wisdom.
However, as an American citizen, I want to vent just a bit about 409A and the
millions it has cost our businesses. This money could have been better spent in
improving the competitive position of US industry. The 409A debacle is a microcosm
of a tax system gone rotten.
I'm not happy
It would be foolish not to want extra time to comply. After all, we are dealing with
a law that, since its 2004 infancy, has been analyzed and parsed as if it were
Talmud, including Notice 2005-1, September 2005 proposed regulations, and a 397
page "final" regulations effort, that was clarified twice after the April, 2007
promulgation, and then extended in a miscalculated half effort, just two months
before the current full extension.
My clients took the deadlines seriously, invested the time, have documents in
place, and would like to go on to other matters. A one year extension, frankly, will
just encourage more wheel spinning in Washington. Young lawyers who hop
between private firms and Treasury are making a career out of a single section of
the Internal Revenue Code, meant to cure a minor abuse. I doubt that any elected
member of Congress is actually reading the fine print or appreciates the waste of
brains and money which their staffs have spawned, and which the Administration's
bureaucrats are nurturing. Section 409A, like much of the tax-oriented regulation
of our benefits system, is not a sexy enough issue for any powerful elected person
to call for a halt to it all. So the wheels spin on. No one dares challenge new tax
laws labeled as "reforms." No one is looking at the big picture.
Was 409A really necessary?
In the shell game that passes for a National budget process, 409A was falsely
represented in 2004 as a future revenue raiser to offset current cuts in corporate
tax rates. It was also trumpeted as a great reform of Enron-type abuses, and as a
means to prevent executives in troubled companies from accelerating their
deferred compensation payments while investors and employees were left as
bag-holders.
The tax math is flawed, of course. An executive who defers taxable compensation
pays no current taxes, but his employer also gets no current deduction. Deferred
compensation does not really "cost" the Treasury anything. As for Enron, it got so
much publicity because it was a rare instance. Those portions of 409A which deal
with Enron abuses could have been easily implemented anyway: (1) no offshore
trusts or springing rabbi trusts, (2) mandatory 6 month delay on payments to key
employees, and (3) elimination of haircut provisions.
All of the rest of 409A has been made unnecessarily complex. For example, was it
really necessary for regulations to require advance (at the time of deferral)
elections as to when and how to pay money for the separate events of death,
disability, and change in control? The statute simply said that those were events
when payments could be permitted. Why 75 days to pay short term deferrals and
90 days for separation from service payments? Can the complexities of the
installment payment rules be mentioned in polite company? And where are the
rules to tell employers how to quantify all of this on W-2's, or how to administer
409A in a partnership?
How do companies comply when the government can't finish rules in more than
three years? Too much intellect, and not enough wisdom, has made this whole
process as silly as that which surrounded the ill-fated Section 89. Old hands
recall that Congress finally repealed Section 89, but not before industry had
invested millions in a multi-year regulatory and compliance effort which is chillingly
similar to the 409A process today.
Oh well. I guess I should be of good cheer that we have an extension. Still, why
do I have a sinking feeling that next year promises even more complexity and
expense to my clients? And why do I feel, when politicians pander and coo about
tax simplification, that they don't really mean it?
__________________________________________________________________
This article is provided as a courtesy and may not be relied upon as legal advice, or to
avoid taxes and penalties. Distribution to promote, market, or recommend any
arrangement or investment to avoid or evade taxes, including penalties, is expressly
forbidden. Any communication with the author as to its contents, does not, of itself,
create a lawyer-client relationship. Under the ethical rules applicable to lawyers in
some jurisdictions, this may be considered advertising.
theworkplace.biz
