Check Your Bonus Deferral Decisions Now
As we have previously discussed, performance based bonus plans are subject to Section 409A and have to be compliant by January 1, 2009. Employers who have permitted deferral elections to be made in these plans using the "six month" rule under 409A(a)(4)(B)(iii) should review these decision because of changes made to the definition of "performance-based" compensation. If bonus deferral elections are expected in 2009 using the six-month rule but it turns out these bonuses are ineligible, the last chance to make the deferral election will be 12/31/08.
The "performance-based" compensation rule generally gives an exception to the requirement that a deferred election for compensation earned in a taxable year must be made no later than the close of the prior taxable year. If the compensation qualifies as performance-based, the deferral election could be made at any time up until 6 months before the end of the current performance measurement period. The final 409A regulations provides that compensation will be considered "performance-based" even if it will be paid regardless of the satisfaction of the specified measurement criteria if due to the service providers death, disability or a change in control event.
This is important because of the impact of Revenue Ruling 2008-13 on 162(m) bonus plans. 2008-13 held that bonus plans that pay at a target in the case of involuntary termination or retirement do not result in deductible performance-based compensation even when bonuses are actually paid based on meeting specific goals. So even if your bonus plan meets the 162(m) requirements, it may have to be changed in light of the 409A definitions of disability and change-in-control.
If this is all Greek to you, have your executive compensation counsel take a look at your bonus plans and make sure they comply.
