Articles

Volume 37 Number 7 Friday, July 3, 2009

Bringing Underwater Stock Options Back to the Surface by Eric B. Rubin, Esq. Dechert LLP Philadelphia, Pennsylvania Since its peak in October 2007, the stock market has declined by almost 6,000 points, or 42%.1 As the result of this extraordinary decline, employees of many public companies now hold stock options that are severely underwater2 — that is, the exercise price of the stock option exceeds the fair market value of the underlying stock. Underwater stock options are problematic for several reasons. For example, because the value of the underlying stock may have to substantially increase before the stock option will offer any return to the employee, underwater stock options may not provide a meaningful retention tool or performance incentive. In addition, allowing unvested underwater stock options to remain outstanding is a wasteful use of resources, as these stock options must continue to be expensed even though they are likely providing no benefit to the company or its employees.

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2009: A Turning Point in Change-in-Control Excise Tax Gross-Ups? Do Companies Need to Explore New Strategies? by Marshall T. Scott* Watson Wyatt Worldwide Chicago, IL and Mark S. Weisberg, Esq.* Winston & Strawn LLP Chicago, IL The year 2009 may mark a turning point in the controversy over change-in-control excise tax gross-ups. The combination of RMG withhold vote recommendations and the resulting directors' resignations due to a majority of withhold votes will likely cause a decline in the use of excise tax gross-ups. Companies need to explore new strategies for dealing with this change.

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Inside Washington

Section 409A(b) Guidance Not Planned for 2009-2010 Section 409A(b) provides various rules related to funding of nonqualified deferred compensation plans. These include provisions dealing with off-shore property in a trust, trigger provisions related to an employer's financial health, and set-aside of assets in a nonqualified plan of an employer whose defined benefit plan has fallen into at-risk status. To date, the IRS has not issued any detailed guidance on these provisions even though it has issued extensive regulations under §409A(a).

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Section 403(b) Prototype Program — Approval Letters In Announcement 2009-34, the IRS issued a draft revenue procedure regarding the development of a prototype program for §403(b) plans. Comments on the draft revenue procedure, sample plan language and the prototype program in general were requested by June 1, but to date, the IRS has not received many comments.

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Practitioner's Insights

Proposed Regulations Permit Plans to Reduce or Suspend Safe Harbor Nonelective Contributions On May 18, 2009, the IRS published proposed regulations in the Federal Register that would amend the regulations under §401(k) and (m) to permit the reduction or suspension of safe harbor nonelective contributions to §401(k) and §403(b) plans. REG-115699-09, 74 Fed. Reg. 23134 (May 18, 2009). Effective on or after May 19, 2009, employers may adopt a plan amendment during the plan year to reduce or suspend required safe harbor nonelective contributions without losing their plan's qualified status. These proposed regulations are a welcome relief for employers that are experiencing a substantial business hardship, as they provide a much needed alternative to the termination of their safe harbor plans.

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