Executive Compensation

We interrupt our ongoing discussion of compensation risk assessments to point out a scary development from the IRS. Frighteningly, the IRS is already conducting audits of companies' compliance with the complex requirements of Code Section 409A. Conscientious reader Joe Adams sent along a redacted copy of an Information Document Request from the IRS, which asks more than 15 separate questions on 409A compliance, including:

• Identify each of the plans/arrangements and the corresponding participants that provided the participant/service provider a legally binding right in one year to a payment of compensation in a subsequent year that is not a nonqualified deferred compensation plan subject to § 409A. For all such identified plan(s)/arrangement(s), provide the basis for your position that such arrangement is not a nonqualified deferred compensation plan subject to § 409A.
• Did the Company identify the participant(s) who were specified employees for all or any part of 2006? If yes, identify all such specified employees and the period during which the service provider was a specified employee.
• Did the Company make any payments of nonqualified deferred compensation during 2006 to any specified employee upon separation from service? If yes, identify the participant provider, the date of the separation from service, and the date any such payments were made. Was any such payment made within six months after the date of separation from service? If yes, identify such payment and the participant who received it.
• Did any assets become restricted to the payment of deferred compensation, or did any amount of deferred compensation become funded or payable during 2006, as a result of any event that may relate to a decline in the Company's financial condition? If yes, describe each such deferred compensation amount and the participant to whom such amount was paid or owed.
• Did the Company modify any arrangement under which amounts deferred under the plan are subject to § 409A to comply with the rules under §409A? (Must be done prior to 12/31/07). If so, describe plan or arrangement, and each of the modifications.
• To date, have you identified any violations of the requirements of IRC §409A? If so, please explain the nature of the violation(s) and state whether the Company have reported amounts to the affected service providers on Form W-2, Box 12 using Code Z or Form 1099, Box 15b.

Frankly, we had hoped the IRS would limit its enforcement action for the first few years' of 409A's effectiveness, due to the incredible complexity. However, this does not appear to be the case.