The Preservation of Access to Care for Medicare Beneficiaries and Pension Relief Act of 2010 was signed into law by President Obama on Friday, June 25. Among other things, it could ultimately have an impact on standard equity vesting provisions. Why?
Under this Act, the required funding of pension plans for companies relying on the pension funding relief offered by the Act will be increased in any year by the amount of “excess employee compensation” it pays that year, plus the amount of any extraordinary dividends and redemptions.
“Excess employee compensation” is defined as the aggregate amount includible in income for any employee for any plan year over $1 million. Also included in this $1 million amount are assets set aside or reserved during the year to pay nonqualified deferred compensation using a trust or similar arrangement, or transferred to such a trust/arrangement by a plan sponsor to pay deferred compensation to an employee.
But, certain amounts are excluded from the definition of “excess employee compensation,” including “any amount includible in income with respect to the granting after February 28, 2010, of service recipient [employer] stock (within the meaning of section 409A) that, upon such grant, is subject to a substantial risk of forfeiture (as defined under section 83(c)(1)) for at least 5 years from the date of such grant.” In other words, stock options, restricted stock and certain other stock-based compensation granted after February 28, 2010 with at least a 5-year vesting schedule will be excluded from the definition of “excess employee compensation.”
Thus, to the extent companies want to ensure that their pension funding obligations are minimized, they could adopt 5-year vesting for equity awards to ensure they are excluded from the definition of “excess employee compensation” for purposes of the funding requirements.
Here’s a link to the status page with a copy of the enrolled act as passed by House and Senate:
http://www.thomas.gov/cgi-bin/query/z?c111:H.R.3962:
Updated 7/15/2010: Clarified that the “excess employee compensation” and additional funding provisions only apply to companies that take advantage of the pension funding relief provided by the Act.
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My understanding of these new rules is that the requirement to put additional money in the pension plan is only required if your pension plan funding is under the 80% threshold, then all of the things noted in this article could trigger additional pension funding….but only if your pension plan funding is “at risk”, below the 80% threshold.
Here’s how I think this works: if a company makes use of the relief provided under the act for its pension funding obligations, then it becomes subject to a number of other requirements. One of those requirements is to increase its funding by any “excess employee compensation” that was paid during the year. Therefore, to the extent a company wants to minimize the impact of such additional requirements if it were to take advantage of the pension funding relief provisions, it could exclude equity awards with a minimum 5 year vesting period.