IRS Executive Compensation Audit Program

GEORGIA NORTH CAROLINA SOUTH CAROLINA VIRGINIA WASHINGTON, D.C. EQUITY PLAN DESIGN CHANGES REQUIRED TO COMPLY WITH CODE SECTION 409A PROPOSED REGULATIONS January 25, 2006 Both public and private companies will need to review and in most cases amend their equity-1based plans in 2006 to comply with recently proposed regulations under Code Section 409A, which establishes a new federal income taxation scheme for any plan or arrangement deemed to involve "deferred compensation." Section 409A may apply to many types of equity-based awards, including stock options, stock appreciation rights ("SARs"), restricted stock awards, restricted stock units, performance awards and phantom stock awards, and will have a significant impact on the design and operation of many types of equity arrangements. Although companies have until December 31, 2006 to amend their plans and arrangements to comply with Section 409A, good faith operational compliance was required beginning January 1, 2005. This client memorandum highlights key provisions of the Section 409A proposed regulations that companies should now be considering. Background New Section 409A, which was enacted as part of the American Jobs Creation Act of 2004, drastically changes the design and operation of all "nonqualified deferred compensation plans," as that term is broadly defined by the new law. Section 409A applies to plans for not only employees, but ...