Act Now to Ensure that Non-Qualified Deferred Compensation Plans Comply with Section 409A by December 31, 2008 to Avoid Negative Tax Consequences

After December 31, 2008, all non-qualified deferred compensation plans must be in writing and their terms must comply with the requirements of Section 409A of the Internal Revenue Code and the regulations issued under it.

Generally speaking, a nonqualified deferred compensation plan (a “plan”) is any agreement or arrangement in which an employee or certain independent contractors (a “service provider”) has a binding right to compensation in one year but the compensation is not payable until a later year. This definition includes arrangements that cover only one service provider or only a limited number of service providers.

The broad definition of a plan can include a number of arrangements that employers might not ordinarily consider to be deferred compensation plans, including:

• Employment agreements with provisions deferring compensation;
• Independent contractor agreements with provisions deferring compensation;
• Bonus and commission agreements with provisions deferring compensation;
• Severance agreements with provisions deferring compensation;
• Restricted stock;
• Stock options (other than options under qualified incentive stock option plans and employee stock option plans); and
• Phantom stock, stock appreciation rights, and other compensation arrangements based on equity equivalents.

In order for a plan to comply with Section 409A, it must be in writing, and meet Section 409A’s requirements, which include:

• Restrictions on when service providers can elect to defer compensation and change their elections;
• Distributions of deferred compensation only upon:
  o A service provider’s separation from service;
  o A service provider’s death;
  o A service provider’s disability;
  o A specified time or according to a fixed schedule;
  o A change in ownership or control of a corporation; or
  o An unforeseeable emergency; and
• Prohibitions against accelerating the distribution of deferred compensation.
  

If a plan does not meet the requirements of Section 409A, all of the service provider’s income that is deferred under the plan after the year 2004 is taxable in the first year that the plan fails to comply with Section 409A (unless there is a substantial risk that the deferred compensation could be forfeited), even if the compensation has not actually been distributed to the service provider at that time. The service provider will also be required to pay an excise tax of 20% of the amount of deferred compensation that should have been included in income and interest on the deferred compensation from the time it should have been included in income. Although these negative consequences primarily affect employees and other service providers, employers are required to report and withhold taxes on income that is taxable to employees and other service providers under defective plans.

With the deadline for compliance looming, you should begin identifying non-qualified deferred compensation plans now in order to make any required amendments before the December 31st deadline. If you need assistance in identifying plans that are subject to Section 409 or in amending plans to comply with Section 409A, please contact us as soon as possible.

Maryland Courts Abstain from Resolving Disputes Between Corporate Members if the Corporation was Formed in Another State

Maryland Courts will abstain from intervening in the internal affairs or management disputes of foreign corporations. An “internal affair” is defined as a dispute over an act, committed by a corporation or an agent of that corporation, that affects the complaining party solely in his capacity as a member of the corporation (whether that be as a stockholder, director, or officer). For example, a complaint of harm that is suffered by a person in his capacity as a minority shareholder, where the act complained of is committed by someone acting in his capacity as a majority shareholder, will not be heard by Maryland courts if the corporation is incorporated in another state.

UPDATED--Important notice to all businesses with any offices or employees in Washington, D.C.

The District of Columbia Accrued Sick and Safe Leave Act of 2008 becomes effective on November 13, 2008. To be a covered employee under the Sick Leave Act, an individual must be employed by the same employer for 1 year without a break in service except for regular holiday, sick, or personal leave granted by the employer and have worked at least 1000 hours during the 12-month period immediately preceding the request for family or medical leave either for an employer located in the District of Columbia.

The Sick Leave Act will require employers with:

(1) 100 or more employees to provide at least one hour of paid sick leave for every 37 hours worked, up to a cap of seven days per calendar year;
(2) 25 to 99 employees will be required to provide at least one hour of paid sick leave for every 43 hours worked, up to a cap of five days per calendar year; and
(3) with fewer than 25 employees to provide at least one hour of paid sick leave for every 87 hours worked, up to a cap of three days per calendar year.

Here are some of the important details about the new Sick Leave Act, although you should seek specific advice for your particular company to ensure compliance with the law, and to understand some important exemptions that might apply to your business or certain employees.

- Employees can use paid sick leave for absences relating to their own physical or mental illness or injury or preventative medical care; to care for a sick child, parent, spouse, domestic partner or any other family member, and to take leave when they are a victim of of stalking, domestic violence, or sexual abuse, for the purpose of obtaining psychological or other counseling or taking legal or some other action associated with these offenses.

- Requests to use sick leave under the Sick Leave Act must be made in writing and in advance if the leave is foreseeable, but employers can request reasonable verification of the legitimacy of the request.

- Upon termination of employment, employers are not required to cash out accrued but unused sick leave.

- Employers cannot retaliate against an employee who takes leave pursuant to the new law.

- Employers will be required to conspicuously post a notice summarizing the Sick Leave Act in several languages once such a notice is prepared by the Mayor.

Again, there are important exemptions to the Sick Leave Act that might apply to your business or certain employees, such as exemptions for certain restaurant staff, independent contractors, exempt employees under the Fair Labor Standards Act, and other categories of employees.

It is important to have, by November 13, completed a review of your company’s existing practices and policies that to ensure that they comply with the Sick Leave Act’s requirements, make any changes to your company’s policies (and notify employees of these changes) before the Sick Leave Act takes effect, and put into place a compliance and monitoring plan. Please contact Nicole Windsor at (410) 583-2400, or by email her at windsor@bowie-jensen.com, for this useful advice.

Maryland Flexible Leave Act Now in Effect

Employers should now be complying with Maryland’s new "Flexible Leave Act," which took effect October 1, 2008. The Act requires private-sector employers in Maryland with 15 or more employees and who provide their employees with paid leave, to:

(1) permit their employees to use any type of accrued paid leave (sick, vacation, personal or paid time off) to care for the illness of a child, spouse or parent; and

(2) permit their employees to elect the type of earned leave that they will use for this purpose.

The law prohibits covered employers from taking adverse employment action against an employee who uses paid leave for the illness of an immediate family member. The law does not define the term “illness” and does not include a provision which allows employers to verify the existence of the illness for which leave is being taken. As such, unless or until the statute is clarified, employers will need to interpret the term broadly or risk violating the law.

For assistance with this important policy review and change, please call Nicole Windsor at 410-583-2400, or email her at windsor@bowie-jensen.com.