Wednesday, December 1, 2010

It's Extremely Important to Have Complete and Accurate 409A Documents -- So Says the 11th Circuit Court of Appeals

On November 16, the 11th Circuit Court of Appeals rendered its decision in Graphic Packaging Holding Corporation v Humphrey. You can read the decision here:

Despite their growing numbers, most of us are not attorneys (I'm not) and don't revel in the reading of court decisions, so I'm going to try to save your eyes (and your brain) some serious pain. Rather than going through all of the court's legal reasoning, we'll look at this one from the proverbial 30,000 feet. In other words, we'll hit the high points and give you a VERY key lesson to be learned.

Mr. Humphrey was the President and CEO of Graphic Packaging (GPC) (or one of its predecessors) from 1997 through 2006 and served as its Vice Chairman in 2007. He retired from GPC on December 31, 2007 as a   specified employee (a term of art under Code Section 409A that usually requires that the employee experience a 6-month delay in payments from a nonqualified deferred compensation (NQDC) plan). Mr. Humphrey was a participant in such a plan, the"2004 Stock and Incentive Compensation Plan" under which he received a number of restricted stock units (RSUs).

Because the GPC stock declined in price over the period from December 31, 2007 until June 30, 2008, Mr. Humphrey's RSUs were worth less at the end of the 6-month period. When GPC paid him out his RSUs, they paid him the smaller amount.

Mr. Humphrey sued and the 11th Circuit Court of Appeals ruled in his favor.

Without going through all of the legal mumbo-jumbo, the court reasoned the following:

  • Code Section 409A does not specify how the amount of  a payment should be calculated at the end of the 6-month waiting period for specified employees. It does not mention a valuation method or valuation date and does not mention the accrual of interest.
  • The plan document did not specify how the amount of the payment should be calculated either.
  • The company (or their counsel/advisers) wrote the plan document and the onus was on them to get it right.
So, the lesson is that an NQDC plan should answer these questions and answer them clearly and unambiguously. Do your plans do that? Many that I have seen do not.

Suppose they don't. Notice 2010-6 as amended by Notice 2010-80 (you can read about it here: ) generally allows plan sponsors to amend their 409A plans by the end of 2010 without penalty (this is a generality and you should not assume that you have no penalty without a specific understanding of your facts and circumstances). A complication might occur if this was a material modification to the plan document, but as it will not uniformly improve the benefit for employees, my non-legal take on this is that it will not be a material modification. In either case, get your plan amended to say what it should say. Make sure that it is reflective of past practices and that future practices will follow the plan.

If I were in an employer's shoes, I would look to an expert for assistance with this, and not necessarily the attorney who drafted the plan. Attorneys are experts in legal issues, but often are not in plan administration and this particular issue has implications for administration. I would look to a consultant with knowledge of the law, knowledge of the administrative issues, and the ability to understand the issues.

As always, this author does not provide legal, tax or accounting advice.

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