Model Policy for Determining Specified Employees under Section 409A

A policy that can be adopted by a publicly traded company to determine which employees are specified employees for purposes of applying the six-month delay for paying deferred compensation benefits on separation from service under Section 409A of the Internal Revenue Code. This Standard Document has integrated drafting notes with important explanations and drafting tips.

Sandra W. Cohen, Osler, Hoskin & Harcourt LLP
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General
General

Every publicly traded company that allows for payment of deferred compensation benefits subject to Section 409A (www.practicallaw.com/1-506-3280) of the Internal Revenue Code (Section 409A) as a result of separation from service must delay payments to specified employees (www.practicallaw.com/4-502-9987) for six months (or, if earlier, until the date of the employee's death). The company's identification date, effective date, method for determining its specified employees and any optional provisions it has elected should be documented to ensure accurate and uniform administration of the company's specified employee policy. The provisions must be applied consistently to all of the company's deferred compensation plans subject to Section 409A.

 

[NAME OF COMPANY]
Policy for Determining Specified Employees Under
Section 409A of the Internal Revenue Code

This policy for determining specified employees was adopted by [NAME OF COMPANY]'s [Board of Directors/Compensation Committee] on [DATE].

BACKGROUND

 A six-month delay must be imposed on payments due to separation from service to certain individuals who are identified as specified employees of [NAME OF COMPANY] (the "Company") for the following compensation plans:

  • [LIST PLANS]; and

  • Any other deferred compensation plans or arrangements that are subject to Section 409A of the Internal Revenue Code of 1986, as amended (the "Code").

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List Names of Plans
List Names of Plans

Include all deferred compensation plans or arrangements offered through the employer and any members of its controlled group (www.practicallaw.com/6-502-4658) that are subject to Section 409A.

 

The Company has adopted this policy to establish consistent rules to determine which employees are specified employees subject to the six-month delay.

SPECIFIED EMPLOYEE POLICY

 All individuals identified as specified employees of the Company shall be subject to a six-month delay in payment resulting from a separation from service that occurs during the 12-month period beginning on the effective date, to the extent that such payment is subject to Section 409A of the Code; provided, however, that if the employee dies during the six-month delay period, payment shall be made within 30 days of the date of the employee's death.

IDENTIFICATION DATE

 The "Identification Date" shall be: [DECEMBER 31/[OTHER IDENTIFICATION DATE]]. Any change to the Identification Date will not be effective for a period of at least 12 months.

Hide Note: Identification DateNote: Identification Date
Identification Date
Identification Date

The identification date serves as the end of the 12-month period that is used as the measure of whether an employee meets the specified employee qualifications.

Under Section 409A, the default identification date is December 31 (and therefore the measuring period is the calendar year). However, the employer may specifically elect any other date in accordance with Section 409A if the date is the same for all of the employer's nonqualified deferred compensation plans. The specified employee identification date may be changed, but the new date may not take effect for 12 months.

 

EFFECTIVE DATE

 The "Effective Date" shall be: [APRIL 1/[OTHER EFFECTIVE DATE]].

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Effective Date
Effective Date

The effective date is the date on which the list of specified employees becomes effective.

Under Section 409A, the default effective date is the first day of the fourth month after the identification date. However, the employer may choose an earlier specified employee effective date in accordance with Section 409A, but it cannot be more than four months after the identification date and must be the same for all of the employer's nonqualified deferred compensation plans. The list of specified employees on the identification date will remain in effect for a 12-month period beginning with the effective date. The specified employee effective date may be changed, but the new date may not take effect for 12 months.

 

IDENTIFYING SPECIFIED EMPLOYEES

 The Company shall identify specified employees in accordance with the [Specified Employees under the Default Method/Specified Employees under an Alternative Method].

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Choosing Method to Identify Specified Employees
Choosing Method to Identify Specified Employees

Employers may adopt the default method for identifying specified employees under Section 409A or they may choose an alternative method.

Under the default method, specified employees are identified according to standards in Section 409A. However, employers must designate which positions are officers for purposes of Section 409A and what types of compensation are included in calculating total compensation.

Under the alternative method, employers select their own method of identifying specified employees, subject to certain rules in Section 409A.

Employers should adopt one method and clearly document their decision. If the employer chooses to use the default method, it should include the provisions titled "Specified Employees Under the Default Method," "Selection of Officers" and "Determination of Total Compensation" in its policy. If the employer chooses to use an alternative method, it should include only the provision titled "Specified Employees under an Alternative Method" in its policy. All provisions not relating to the chosen method should be deleted.

 

[SPECIFIED EMPLOYEES UNDER THE DEFAULT METHOD

 [The term "Specified Employee" means an employee of the Company, or any member of its controlled group, who meets one of the following requirements at any time during the 12-month period ending on the Identification Date:

  • Any employee who owned more than 5% of the stock of the Company at any time during the 12-month period.

  • Any employee who owned more than 1% of the stock of the Company at any time during the 12-month period and received annual compensation greater than $150,000.

  • One of the 50 most highly compensated officers of the Company, provided that the officer's total annual compensation is greater than the indexed threshold amount of $170,000 for 2014.

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Specified Employees under the Default Method
Specified Employees under the Default Method

Some companies with publicly traded stock might not have any employees that have 5% stock ownership or 1% stock ownership with annual compensation greater than $150,000.

Employers must consider the following rules when identifying officers as specified employees:

  • The maximum number of officers that can be designated as specified employees is 50.

  • If the employer (including all members of its controlled group) has fewer than 491 employees, the maximum number of officers that must be identified is limited to the greater of 10% of employees, rounded to the next higher integer, or three officers.

  • Officers who are specified employees because of their stock ownership are excluded in determining the 50 most highly compensated officers.

For more information on how to identify specified employees under Section 409A, see Practice Note, Specified Employees under Section 409A: Officer (www.practicallaw.com/7-501-1330) and Determining Specified Employees Under Section 409A Checklist (www.practicallaw.com/3-501-1332).

 

Selection of Officers

"Officers" shall include each of the following executives: [COMPANY GROUPS, LEVELS, TITLES, OR OTHER METHOD OF DETERMINING EXECUTIVES] of the Company (or any members of its controlled group).

Hide Note: Officers as Specified EmployeesNote: Officers as Specified Employees
Officers as Specified Employees
Officers as Specified Employees

The company should designate which positions are officers for purposes of Section 409A. Specified employees include officers who receive compensation that is greater than the threshold amount and have the requisite authority.

Generally, an "officer" means an administrative executive who is in regular and continued service and does not include those employed for a special and single transaction.

For more information on designating officers as specified employees, see Practice Note, Specified Employees under Section 409A (www.practicallaw.com/7-501-1330).

 

Determination of Total Compensation

"Total Compensation" shall be determined as follows:

[For US-based employees or others for whom a W-2 is issued by the Company or its affiliates: the amount of taxable wages reported on Form W-2.

For employees not receiving a Form W-2: the amount determined according to Treasury Regulation Section 1.415(c)-2(a) which would be reportable on Form W-2 if the employee were to receive one.]

OR

[For all employees: The amount determined according to Treasury Regulation Section 1.415(c)-2(a).

Income recognized upon vesting of restricted stock and exercise of non-qualified stock options [will/will not] be included in Total Compensation.

Payments from the following nonqualified deferred compensation plan(s) [will/will not] be included in Total Compensation:

  • [LIST NONQUALIFIED DEFERRED COMPENSATION PLAN(S)]]

Hide Note: Determining Total CompensationNote: Determining Total Compensation
Determining Total Compensation
Determining Total Compensation

Employers can choose between the first option, which is based on Form W-2 wages, or the second option, which allows any alternative definition of compensation that is permitted under IRC Section 415 of the Code. As part of an alternative definition, employers should elect whether to include amounts realized from the exercise of non-qualified stock options or the vesting of restricted stock and distributions from nonqualified deferred compensation plans. If distributions from nonqualified deferred compensation plans are included in total compensation, the names of the plans that are included should be listed. Additional rules exist for selecting and applying the alternative definitions.

Employers should make their selection clear by removing the option that is not selected.

For more information on defining compensation under Section 409A, see Compensation Used To Determine Specified Employees Checklist (www.practicallaw.com/7-501-1325).

 

Foreign compensation earned by non-resident alien employees [will/will not] be included in Total Compensation.]

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Foreign Compensation
Foreign Compensation

Employers should elect whether or not foreign compensation earned by non-resident alien employees is included in total compensation. The default rule is that foreign compensation is included in the calculation.

 

OR

[SPECIFIED EMPLOYEES UNDER AN ALTERNATIVE METHOD

 The term "Specified Employee" means an employee of the Company, or any member of its controlled group, who meets one of the following requirements at any time during the 12-month period ending on the Identification Date: [ALTERNATIVE METHOD].]

Hide Note: Alternative MethodNote: Alternative Method
Alternative Method
Alternative Method

An employer may choose an alternative method to identify specified employees who will be subject to the six-month delay, provided that the alternative method is:

  • Reasonably designed to include all specified employees (as would be determined under the default method).

  • Objectively determinable and does not allow any employee to directly or indirectly manipulate the method.

  • Results in either all employees or no more than 200 employees being identified as specified employees.

For more information on establishing an alternative method, see Specified Employees under Section 409A: Alternative Method for Determining Specified Employees (www.practicallaw.com/7-501-1330).

 

[COMPANY NAME]

By:____________________
[NAME]
[TITLE]

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