1. New 409A Document Correction Program: What You Need to Know Now February 11, 2010

2. 1 Overview of Section 409A Internal Revenue Code Section 409A was added by the American Jobs Creation Act of 2004 Enacted in response to collapse of Enron

3. 2 Overview of Section 409A Section 409A Governs non-qualified deferred compensation (NQDC) arrangements Imposes strict rules on NQDC deferral elections and time and form of payment, including for example limiting payment events to separation from service, change in control, death, disability, unforeseeable emergency and fixed dates/schedules requiring six-month wait for “specified employees” following separation from service prohibiting “haircuts” and offshore funding of NQDC Imposes adverse tax consequences on participants including income inclusion upon vesting, 20% penalty tax and interest at the federal underpayment rate plus 1% Imposes reporting requirements on companies

4. 3 Overview of Section 409A Section 409A applies to a broad range of arrangements, including certain: Traditional deferred compensation, supplemental pension and supplemental savings plans Bonus, incentive and equity-based arrangements Employment, consulting, change in control, severance and retention agreements Relocation, tax equalization and reimbursement arrangements and International arrangements

5. 4 Overview of Section 409A Section 409A does not apply to: Tax-qualified plans, life insurance and many welfare arrangements Non-discount stock options, non-discount SARs and restricted stock Certain severance and international arrangements Short-term deferrals (amounts paid by March 15 th of year following year in which amount vests) Grandfathered arrangements – NQDC that was earned and vested as of December 31, 2004 provided arrangement is not materially modified

6. 5 Section 409A Compliance Timeline 200420052006200720082009 Jobs Act Enacted 10/04 409A Effective 1/1/05 Operational Compliance Required 1/1/05 Documentary Compliance Required 1/1/09

7. 6 Section 409A Correction Program Issuance Timeline Operational Compliance Correction Issued 12/08 Notice 2008-113 20042010200620072008200920052011 Document Correction Program Issued 1/10 Notice 2010-6 Proposed Income Inclusion Regulations Issued 12/08 TARP Recipient Relief Issued 12/09 Notice 2009-92

8. 7 Section 409A Operational Correction Program Permits correction of certain operational violations, including: Early and late payments Stock rights Operational failures involving limited amounts ($16,500 for 2010) Limits relief for “insiders”: Directors, officers and > 10% beneficial owners 10% beneficial owners are determined under Section 16 of the Securities Exchange Act Limit for insiders applies to both publicly- and privately-held companies

9. 8 Section 409A Operational Correction Program Program is available only if:  operational failure is inadvertent and unintentional  employer has taken steps to avoid recurrent operational failures  employer fully corrects operational failure  all requirements for particular correction are met  employer complies with applicable notice and reporting requirements Program is not available if: x employer’s tax return is under audit with respect to year in which operational failure occurred x employer experienced a substantial financial downturn or “financial or other issues” in year an erroneous payment was made to an employee, if downturn or other issue would pose significant risk that employer would not be able to pay amount when due

10. 9 Section 409A Operational Correction Program Correction of Early and Late Payments To correct early payments, employee must repay employer To correct late payments, employer must pay employee In some cases, employee must repay employer interest and account balances must be adjusted for earnings and losses Corrections generally must be made in same year or, for non-insiders, in year following year in which operational failure occurred if correction is made in same tax year as operational violation, employee may avoid certain adverse tax consequences

11. 10 Section 409A Operational Correction Program Correction of Stock Rights (for example, discount stock options) Employers may reset exercise price to amount not < FMV on date of grant, if exercise price is reset: before stock right is exercised for insiders, by end of year in which stock right is granted for non-insiders, by end of year following year in which stock right is granted Other Corrections Operational failures involving limited amounts ($16,500 for 2010) Certain early and late payments not corrected within two years corrections are subject to the 20% penalty tax but not punitive interest rate

12. 11 Section 409A Operational Correction Program Reporting and Notice Requirements Employer must attach statement to its federal tax return for if correction is made in same year, federal tax return for that year if correction is made in a later year, federal tax return for year in which failure was discovered Employer must furnish statement to each affected employee For stock right corrections, company is not required to furnish statements to participants

13. 12 Section 409A Operational Correction Program Statement Filed With Employer’s Federal Tax Return  Name of affected employee  Affected employee TIN  Insider/non-insider status  Name of NQDC arrangement  Brief description of failure and circumstances under which it occurred  Brief description of steps taken to correct failure  Date correction was completed  If correction was made in later year, brief description of steps taken to avoid recurrence of failure and date steps were implemented  Statement that operational failure is eligible for correction under IRS Notice 2008-113 and that all action has been taken and other requirements met to correct failure Statement Provided to Affected Employees  Statement that employee is entitled to relief under IRS Notice 2008-113  If failure is corrected after year in which failure occurred, a statement that employee must attach statement to his/her federal tax return  Name of the NQDC arrangement  Brief description of failure and circumstances under which it occurred  Brief description of steps taken to correct failure  Date correction was completed  If correction was made in later year, steps taken to avoid recurrence of failure and date steps were implemented  Statement that operational failure is eligible for correction under IRS Notice 2008-113 and that all action has been taken and other requirements met to correct failure

14. 13 Section 409A Income Inclusion Regulations Provides guidance on how to calculate amounts included in income and taxes and penalties for violations of Section 409A Permits certain document corrections in very limited cases If document is corrected in year in which amount is not vested, arrangement may be deemed to be in compliance at the start of the next tax year May significantly reduce adverse tax consequences to participants Limits on document correction under income inclusion regulations Applies only to non-vested amounts Of limited value when there are vested and non-vested NQDC arrangements of the same type Subject to anti-abuse rule Employer must still report non-compliant NQDC arrangement to IRS and affected participants IRS may further restrict use of income inclusion regulations to correct document failures related to non-vested amounts

15. 14 Section 409A Income Inclusion Regulations Example ABC company entered into change in control (CIC) agreements with several executives that provide for installment payments in the event of a CIC. Amounts payable under the agreements are subject to 409A. CIC definition does not comply with 409A. Assume no amount is payable under the agreements except in the case of CIC and there are no similar arrangements that would be required to be aggregated with the CIC agreements for purposes of 409A. In 2009, CIC definition is amended to comply with 409A. Treatment Under Income Inclusion Regulations As long as no CIC occurs in 2009, CIC agreements will be deemed to be in compliance with Section 409A on January 1, 2010. Employees covered by CIC agreements will not be subject to adverse tax consequences for 2009 (or subsequent years) resulting from non-compliant definition of CIC. ABC company must report existence of non-compliant CIC agreements on each affected employee’s W-2s for 2009, but amount of NQDC income reported will be zero.

16. 15 Section 409A Relief for TARP Recipients IRS Notice 2009-92 provides Section 409A relief for TARP recipients required by Special Master to restructure NQDC Special Master issued rulings in October 2009 and December 2009

17. 16 Section 409A Document Correction Program New Section 409A Document Correction Program: Set forth in IRS Notice 2010-6 published in January 2010 Imposes strict requirements to obtain relief Generally does not require plan aggregation Applies special rules to multiple failures and failures over multiple years In some cases, requires participants to include amounts in income and to pay penalties In some cases, requires filings by companies and participants Offers special relief for corrections made in 2010 and, in some cases, 2011

18. 17 Section 409A Document Correction Program Program Eligibility Requirements Document failure must be inadvertent and unintentional Document failure must be specifically identified in correction program Document failure must be fully corrected in manner specified in correction program Company must make reasonable efforts to fully correct all substantially similar failures Federal tax returns of company and participant must not be under audit with respect to NQDC (subject to certain exceptions) Where required, participant must include amounts in income and pay penalties Where required, company and participant must comply with information reporting requirements

19. 18 Section 409A Document Correction Program Eligible Document Failures  Ambiguities in plan language  Permissible payment events with no definition or ambiguous definition  Non-compliant definitions such as “termination of employment” instead of “separation from service”  Impermissible payment periods following permissible payment events  Impermissible payment schedules and impermissible payment events  Failure to include six-month wait for specified employees  Impermissible initial deferral elections Ineligible Document Failures x Intentional failures x Listed (certain abusive) transactions x Stock rights x “Linked plans” (subject to certain exceptions) x Short-term deferrals

20. 19 Section 409A Document Correction Program 2010 Transitional Relief Eligible document failures corrected by 12/31/10 are deemed to be corrected as of 1/1/09 As long as any impermissible payments or failures to pay under corrected document are treated as operational failures and corrected Income inclusion that would otherwise result under document correction program if payment event occurs within one year of correction is waived Company and participant must still comply with information reporting requirements under document correction program

21. 20 Section 409A Document Correction Program 2011 Transitional Relief Permits companies to fix certain document failures under “linked plans” Permits companies to fix impermissible payment schedules that are tied to payments received by the company from third parties Permits companies whose tax returns are under audit with respect to a particular NQDC document failure to correct by end of 2011 other document failures IRS has not yet identified

22. 21 Section 409A Document Correction Program Special Relief for Newly Adopted Plans Eligible document failures under new NQDC “plan” may be corrected by later of: end of calendar year in which legally binding right arises under plan; and 15 th day of 3 rd month after legally binding right arises under plan For this purpose, “plan” refers to all similar plans that must be aggregated under Section 409A regulations this means that this relief only applies if company does not have any other plan of type required to be aggregated with the “new” plan Must also correct any operational failures by end of year

23. 22 Section 409A Document Correction Program Correction Requirements Amendments - In most cases, company must amend NQDC plan documents Taxes and Penalties - In some cases, participants must include amounts in income and pay 20% penalty tax Filings - In most cases, companies and participants must file information statements

24. 23 Section 409A Document Correction Program Correction Requirements – Amendments IRS Notice 2010-6 specifies when amendments are required and what amendment must include Company must use commercially reasonable efforts to identify and correct substantially similar document failures

25. 24 Section 409A Document Correction Program Correction Requirements - Income Inclusion and Penalties Required in some (but not all) cases Income inclusion ranges from 25% to 50% of amount to which pre- correction provision applies (50% in most cases) Penalties include 20% excise tax but not punitive interest In many cases, income inclusion and penalties only apply if non- compliant payment event would have triggered payment within one year of correction For Example Assume NQDC plan’s CIC definition does not (but is otherwise required to) comply with Section 409A, for example by including IPO in definition of CIC. On 6/1/11, company amends its CIC definition to comply with Section 409A. If IPO occurs within one year after 6/1/11, affected participants must include 25% of NQDC in income and pay 20% penalty tax. If compliant CIC event occurs within one year of correction (or if IPO occurs after 6/1/12), no income inclusion or penalty taxes are required.

26. 25 Section 409A Document Correction Program Company Filing Requirements Report correction on Information Statement Attach information statement to its timely filed (including extensions) Federal tax return for: taxable year in which correction is made, and if participant is required to include amount in income, for subsequent calendar year Furnish copy of information statement to each affected participant. §409A Document Correction under §[Insert Appropriate Section] of Notice 2010-6  Affected participants’ names and TINs  Affected plan names  Specified information related to document failure and correction  Amount involved, amount includible in participants’ income and percentage of amount involved

27. 26 Section 409A Document Correction Program Participant Filing Requirements – Where required, affected participants must: File a copy of the information statement with the affected participant’s timely-filed Federal tax return for the taxable year in which the correction occurred, and the subsequent calendar year, if the affected participant is required to include any amount in income to receive relief under the program

28. 27 Section 409A Document Correction Program Eligible Document Failures Under IRS Notice 2010-6 Ambiguous plan terms Impermissible definitions of otherwise permissible payment events Impermissible payment periods following permissible payment events Certain impermissible payment schedules and payment events Failure to include six-month wait for specified employees Impermissible initial deferral elections

29. 28 Section 409A Document Correction Program Ambiguous Plan Terms Not necessarily a document “failure”; in many cases, no correction will be required, although a clarifying amendment may be recommended Payment “as soon as practicable” (or substantially similar language) following permissible payment event Correction is not required as long as payment has been or will be made within time required by Section 409A Cannot have a pattern or practice of paying outside the time frame required by Section 409A

30. 29 Section 409A Document Correction Program Ambiguous Plan Terms (continued) Payment event with no definition or ambiguous definition For example: “Termination of employment” instead of “separation from service” “Acquisition” instead of Section 409A-compliant CIC event No amendment needed as long as no pattern or practice of interpreting the provision in violation of Section 409A or no court interpretation in violation of Section 409A Permitted to amend provision to clarify ambiguity (either by inserting “409A savings clause” or including a specific, compliant definition) New definition cannot expand provision more than necessary to comply with Section 409A

31. 30 Section 409A Document Correction Program Impermissible Definitions of Otherwise Permissible Payment Events Separation from Service Must correct before the payment event occurs If “impermissible” separation from service occurs within one year following correction, then 50% of amount involved will be includible in income and subject to additional 20% tax (but not additional interest tax) Change in Control (not all impermissible definitions can be corrected) Must correct before the payment event occurs If “impermissible” CIC occurs within one year following correction, then 25% of amount involved will be includible in income and subject to additional 20% tax (but not additional interest tax) Disability Can correct before or after the payment event occurs; if correct after, may need to treat payment as an operational failure under IRS Notice 2008-113

32. 31 Section 409A Document Correction Program Impermissible Payment Periods Following Permissible Payment Events Payment window greater than 90 days and less than 366 days It is not a document failure to have a payment window that, by its terms, cannot span more than one tax year Correct either by removing the payment period or reducing it to 90 days Generally must correct before payment event occurs, but there is limited ability to correct after payment event occurs (with partial inclusion in income under Section 409A) Payment Periods Contingent on Participant Action For example, execution of a release of claims Must correct before event occurs Correct by fixing payment on last day of period during which participant can take the action (e.g., execute the release) Or, if no specified period, then fix payment on 60 th or 90 th day following payment trigger

33. 32 Section 409A Document Correction Program Impermissible Payment Periods Following Permissible Payment Events Payment Periods Contingent on Participant Action (continued) Example of non-compliant provision: 409A amount is payable during 90- day period following separation from service, but in no event before executive executes a general release of claims and such release is no longer subject to revocation For “specified employees,” need to coordinate this correction principle with required 6-month wait for payments triggered by a separation from service Note that this rule applies to amounts subject to Section 409A; short-term deferrals and certain “involuntary” severance arrangements are exempt from Section 409A

34. 33 Section 409A Document Correction Program Certain Impermissible Payment Events and Payment Schedules Arrangements that contain permissible payment events and impermissible payment events Correct by amending arrangement to remove impermissible payment events before they occur Arrangements that contain only impermissible payment events Correct by amending before impermissible payment events occur Correction is to fix payment date as the later of separation from service and 6 th anniversary of date of correction Correction does not completely avoid income inclusion under Section 409A; must include in income 50% of amount involved, and subject to additional 20% tax (but not additional interest tax)

35. 34 Section 409A Document Correction Program Certain Impermissible Payment Events and Payment Schedules (continued) Impermissible Alternative Payment Schedules Correction addresses the “pivot point” issue – when there is more than one time or form of payment for a single payment trigger Voluntary vs. involuntary separations from service Must use the form of payment for involuntary separations Otherwise, correction principle is to first eliminate the “shorter” payment schedule If payment trigger occurs within one year of the correction, may need to include in income 50% of amount involved, and subject to additional 20% tax (but not additional interest tax)

36. 35 Section 409A Document Correction Program Certain Impermissible Payment Events and Payment Schedules (continued) Impermissible discretion for payment schedule following payment event (including impermissible subsequent deferral elections) Applies to discretion to change payment schedule; not payment trigger Correct by removing discretion and following plan default payment provision If no default payment provision, correction principle is to eliminate “shorter” payment schedules If payment trigger occurs within one year of correction, must include in income 50% of amount involved, and subject to additional 20% tax (but not additional interest tax)

37. 36 Section 409A Document Correction Program Certain Impermissible Payment Events and Payment Schedules (continued) Impermissible company discretion to accelerate payment For example, company can terminate plan early and pay out benefits Intentionally does not apply to participant discretion to accelerate payment (for example, a “haircut”) Correct by amending to remove discretion before discretion is exercised Impermissible in-kind benefit or reimbursement provision Permits amendment when document fails to comply with certain aspects of Section 409A’s “5-part rule” for in-kind benefits or reimbursements Must correct before event occurs that triggers benefit/reimbursement right General correction principle is to spread benefit out (pro rata) over number of years in which benefit right applies

38. 37 Section 409A Document Correction Program Failure to Include Six-Month Wait for Specified Employees Must amend before separation from service occurs Payment can be made no earlier than later of (i) six months after separation from service or (ii) 18 months after date of correction If separation from service occurs within one year following correction, then 50% of amount involved will be includible in income and subject to additional 20% tax (but not additional interest tax)

39. 38 Section 409A Document Correction Program Certain Initial Deferral Elections Applies to deferral elections of compensation that would not otherwise be “deferred compensation” No violation if the impermissible deferral provision is not applied If it is applied, can correct by the end of 2 nd year following the year in which the deferral election deadline occurred Correct by removing impermissible deferral provision and treating any impermissibly deferred amounts as operational violations that are then corrected under IRS Notice 2008-113

40. 39 Section 409A Document Correction Program Next Steps Take “second look” at NQDC plan documents to identify potential document failures If any document failures exist: determine whether document failures may be corrected under document correction program or income inclusion regulations determine whether there are any other substantially similar failures which require correction determine whether corrected plan document provisions will result in operational failures that will need to be corrected

41. 40 Section 409A Documentary Compliance Program If Correction Will be Made Under IRS Notice 2010-6 Prepare and adopt amendments to plan and all plans that contain substantially similar document failures Where required: obtain consent of Board, Compensation Committee and affected participants file 8-Ks update proxy and other public filings file information statements with IRS furnish information statements to participants

42. 41 Section 409A Document Correction Program Advantages of Document Correction Program Reduces or eliminates potential adverse tax consequences to participants Reduces risk of litigation by affected participants Avoids or reduces consequences that might otherwise occur if document failures are discovered on audit Disadvantages of Document Correction Program In some cases, may result in income inclusion and penalty taxes that may not otherwise have been discovered by IRS In some cases, requires filing of information statement with IRS and furnishing information to participants In most cases, requires formal plan amendments Requires efforts to correct substantially similar document failures In many cases, requires consent of Board, Compensation Committee and affected participants For public companies, may require 8-K filings and revised proxy disclosure

43. 42 Links to Additional Materials IRS Notice 2010-6 – Document Correction Program IRS Notice 2010-6 Available at: http://www.irs.gov/pub/irs-drop/n-10-06.pdf IRS Notice 2009-92 – Special Relief for TARP Recipients IRS Notice 2009-92 Available at: http://www.irs.gov/pub/irs-drop/n-09-92.pdf Proposed Income Inclusion Regulations - §1.409A-4 Proposed Income Inclusion Regulations Available at: http://www.irs.gov/irb/2008-51_IRB/ar14.html IRS Notice 2008-113 – Operational Correction Program IRS Notice 2008-113 Available at: http://www.irs.gov/pub/irs-drop/n-08-113.pdf

44. 43 Links to Additional Materials Client Alert – IRS Announces Long-Awaited Section 409A Document Correction Program Client Alert – IRS Announces Long-Awaited Section 409A Document Correction Program Available at: http://www.chadbourne.com/files/Publication/8f93a6db-7379- 4ddd-a667-333dbaa09f9b/Presentation/PublicationAttachment/22b9a870- 0e1d-4ecd-ad54-70e664cf333e/Correction%20Program.pdf Client Alert – New Section 409A Guidance on Income Inclusion and Reporting and Withholding Obligations Client Alert – New Section 409A Guidance on Income Inclusion and Reporting and Withholding Obligations Available at: http://www.chadbourne.com/files/Publication/9c2a6d41-3dac- 47dd-8a8b-948165d1f728/Presentation/PublicationAttachment/4217b792- 0031-4a77-abb3-0efc66b1f6e7/CA-122908-409AGuidance.pdf Client Alert – New Program to Correct Certain 409A Operational Failures Client Alert – New Program to Correct Certain 409A Operational Failures Available at: http://www.chadbourne.com/files/upload/CA-121208- 409AOperationalFailures.pdf

45. 44 Section 409A Document Correction Program Thank You ******************** IRS Circular 230 Disclaimer: To ensure compliance with requirements imposed by the IRS, we inform you that any U.S. tax advice contained in this document is not intended or written to be used, and cannot be used, for the purpose of (i) avoiding penalties under the Internal Revenue Code; or (ii) promoting, marketing or recommending to another party any transaction or tax-related matter addressed herein. For more information about why we are required to include this disclaimer, please click here or go to http://www.chadbourne.com/files/upload/circular230.pdf. ******************** click here