As 2013 comes to an end, we are pleased to present you with our traditional End of Year Plan Sponsor “To Do” Lists. This year we are presenting our “To Do” Lists in three separate Employee Benefits Updates. Part one of the series will cover year-end executive compensation issues, part two will cover health and welfare plan issues and part three will cover qualified plan issues.  Each Employee Benefits Update will provide you with a “To Do” List of items on which you may want to take action before the end of 2013 or in early 2014. As always, we appreciate your relationship with Snell & Wilmer and hope that these “To Do” Lists help focus your efforts over the next few months.

This Employee Benefits Update, part one of our End of Year Plan Sponsor “To Do” Lists, focuses on year-end executive compensation issues.

Executive Compensation “To Do” List

•  Last Chance to Correct Certain Section 409A Document Failures Discovered in 2013: Although not specifically addressed in the Section 409A regulations, most commentators believe that Section 409A document failures can be corrected in years in which the deferred amounts are not yet vested or for which the substantial risk of forfeiture (or contingency upon which the compensation is paid) has not yet occurred. This means that Section 409A document failures discovered in 2013 may be corrected prior to December 31, 2013 without taxes and penalties if the deferred compensation amounts remain unvested through December 31, 2013. To take advantage of this correction opportunity, the amounts in question must remain unvested for the balance of 2013 and correction must occur prior to the date the compensation vests.
• Consider Shareholder Reapproval of Section 162(m) Performance Compensation Plans Approved in 2009: Section 162(m) of the Internal Revenue Code ("the Code") limits the deduction a public company may take for compensation payable to “covered employees” to $1,000,000 per year. “Performance-based compensation” that meets the requirements of Section 162(m) is not subject to this limitation. The Section 162(m) regulations require that, every five years, the shareholders reapprove the performance goals that determine the amount of “performance-based compensation” to be paid. This means that companies that obtained shareholder approval of plans containing Section 162(m) performance goals in 2009 must resubmit the plans for shareholder approval in 2014. This is generally done by having the shareholders reapprove either the 162(m) performance goals or a new incentive plan that provides for the award of compensation that complies with Section 162(m).
• Review Whether Your Equity-Based Compensation Plan Has Sufficient Shares Remaining for 2014 Grants: Employers should review share pool information to determine whether to ask the shareholders to increase the number of shares available for grant. If additional shares are needed, the request should be submitted for shareholder approval at the 2014 annual meeting.
• Consider Adding Separate Annual Limits on Director Equity Awards: In response to the Delaware Chancery Court’s ruling in Seinfeld v. Slager, employers that are adopting or amending equity-based compensation plans in 2014 should consider adding a separate annual limit on director equity awards (most equity-based compensation plans do not currently provide for a separate annual limit on director equity awards). In Seinfeld, the Chancery Court refused to apply the “business judgment rule” to dismiss a challenge to directors who approved large equity awards for themselves under a shareholder-approved equity-based compensation plan. The Court ruled that the plan did not impose “meaningful limits” on the maximum award that could be made to a director, and therefore, lacked sufficient definition to afford protection under the business judgment rule. The questions for employers to consider in light of Seinfeld are whether to (1) add a separate annual limit for director equity awards; and (2) ask the shareholders to approve the limit to afford protection under the “business judgment rule.”
• Code Section 6039 Information Statements Due by January 31, 2014: Section 6039 of the Code requires companies to file a return and provide a written information statement to each employee or former employee regarding: (1) the transfer of stock pursuant to the exercise of an Incentive Stock Option (“ISO”); and (2) the transfer by the employee or former employee of stock purchased under an Employee Stock Purchase Plan (“ESPP”). Section 6039 applies to stock purchased under an ESPP if the stock was purchased at a permitted discount. For ISO grants and ESPP transfers occurring in 2013, the Section 6039 information statements must be provided no later than January 31, 2014.
• Review Grant Procedures for Upcoming Equity-Based Grants: The stock option backdating scandals were solemn reminders of serious corporate, tax, accounting and legal issues that can be resolved by an employer carefully reviewing its grant practices and procedures. An employer may wish to carefully review its stock plan to determine which entity is charged with making grants under the plan and put in place best practice procedures to ensure the proper entity takes the appropriate action as of the date the awards are considered granted.