As 2016 comes to an end, we are pleased to present you with our traditional End of Year Plan Sponsor “To Do” Lists. Like last year, we are presenting our “To Do” Lists in three separate Employee Benefits Updates. Part 1 of the series will cover year-end executive compensation related issues, Part 2 will cover health and welfare plan issues, and Part 3 will cover qualified retirement 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 2016 or in early 2017. 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.

Part 1 - Executive Compensation “To Do” List

• Last Chance to Correct Certain Section 409A Document Failures Discovered in 2016: 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. Accordingly, Section 409A document failures discovered in 2016 may be corrected prior to December 31, 2016 without taxes and penalties if the deferred compensation amounts remain unvested through December 31, 2016. To take advantage of this correction opportunity, the amounts in question must remain unvested for the balance of 2016 and the correction must occur prior to the date the compensation vests. Conservative plan sponsors might consider correcting unvested amounts in accordance with the procedure set forth in Section VII of the proposed clarifications to the Section 409A Regulations, which were issued on June 22, 2016. Although these proposed regulations are not final, the preamble to the proposed regulations provides that plan sponsors may rely on the proposed regulations before the IRS releases final clarifying regulations.
• Nonqualified Deferred Compensation Deferral Elections Should be Made on or Before December 31, 2016: As a general rule, Section 409A requires that compensation deferrals under a nonqualified deferred compensation plan be made before the year in which the underlying services are performed. There are some exceptions to this general rule, but employers should be mindful that Section 409A imposes strict requirements on the timing of compensation deferral elections and that most deferrals of compensation to be earned in 2017 must be made on or before December 31, 2016.
• Consider Shareholder Reapproval of Section 162(m) Performance Compensation Plans Approved in 2012: 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 2012 must resubmit the plans for shareholder approval in 2017. 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 2017 Grants: Employers should review share pool information to determine whether the equity plan has a sufficient number of shares available for upcoming grants. If additional shares are needed, employers should consider submitting the increase for shareholder approval at the 2017 annual meeting.
• Consider Adding Separate Annual Limits on Director Equity Awards: In response to the recent settlement of Calma v. Templeton, employers that are adopting or amending equity-based compensation plans in 2017 should consider adding a separate annual limit on director equity awards. More on the Calma settlement and how that settlement might assist in structuring director compensation programs on a go-forward basis can be found in our prior blog by clicking on the following link here.
• Code Section 6039 Information Statements Due by January 31, 2017: 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 at a discount under an Employee Stock Purchase Plan (“ESPP”). For ISO grants and ESPP transfers occurring in 2016, Section 6039 information statements must be provided no later than January 31, 2017
• 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 governing body is charged with making grants under the plan and implement best practice procedures to ensure the proper entity takes the appropriate action as of the date the awards are considered granted.
• Review Confidentiality Language in Existing Agreements: As highlighted in a prior Snell & Wilmer Legal Alert, earlier this year, the SEC issued two cease and desist orders against public companies finding that the contents of their standard severance agreements violated the Dodd-Frank Act’s prohibition on actions that discourage whistleblowing activities. Given the SEC’s recent focus on this issue, employers may wish to revisit the confidentiality provisions in their existing employment, severance, retention, equity award and similar agreements to ensure that those provisions do not violate Rule 21F-17 of the Exchange Act.
• Consider Revising Stock-Based Incentive Programs in Response to FASB’s New Approach to Share-Based Withholding: Earlier this year the Financial Accounting Standards Board released Update No. 2016-09 (the “ASU”) to improve the accounting treatment of certain stock-based compensation payments. Among other updates, the ASU modifies the manner in which employers withhold on stock-based compensation awards. Pursuant to the ASU, favorable equity accounting treatment will be retained if an employer withholds at the maximum statutory amount necessary to satisfy taxes (or if an employer allows an employee to elect his or her withholding rate, favorable equity accounting treatment should be retained as long as the elected rate does not exceed the maximum statutory rate permitted in the applicable jurisdiction). Employers may wish to revisit their applicable equity plan documents to determine whether amendment is necessary to take advantage of this new approach to share-based withholding. The ASU is effective for fiscal years beginning after December 15, 2016.