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  • BC Network
    Wednesday, July 18, 2012

    Everybody knows that everybody likes sports. According to the Sports Business Journal, employers are parleying their ties to sports teams, leagues and events into employee benefits. Internal marketing of a company’s sports sponsorship can boost morale, provide perquisites, enhance recruiting and publicize corporate philanthropy

    For example, according to the Sports Business Journal, Discover Financial Services, an official sponsor of the National Hockey League, was able to display the Stanley Cup in its suburban Chicago headquarters for a half-day after the Blackhawks won the Stanley Cup in 2010. Workers were welcome to pay a visit to have a look and even have their pictures taken with the trophy. This year, the Cup was displayed in Discover’s New Castle, Del. office as a reward for winning an internal call center contest.

    Other examples include pre-game hospitality sessions, free or discounted game tickets and discounted team merchandise, either as special rewards for exemplary performance or for general availability to employees.

    OMG! Can you inadvertently create a taxable fringe benefit under the Internal Revenue Code or an employee welfare benefit plan subject to ERISA’s reporting and disclosure requirements by providing these sports perks to employees? On the tax question, occasional parties and occasional tickets to sporting events are generally treated as non-taxable de minimis fringe benefits under section 132 of the Code. On the ERISA question, there is no direct guidance in the governing regulations; however holiday gifts such as turkeys or hams are not included in the definition and it appears that the smaller and more occasional the employee reward, the less likely that the Department of Labor will assert that it constitutes an employee benefit plan subject to ERISA. Likewise, the sky is not the limit. If the perks are given too often or the value is too high (think season tickets or Oprah’s iPad giveaway), they will not qualify as de minimis fringe benefits, they will be subject to income and payroll taxes, they may constitute an ERISA employee benefits plan, and they may make the company look silly to employees.

    Please share your thoughts and experience on this subject.

    Disclaimer/IRS Circular 230 Notice

     

    Tuesday, May 22, 2012

    On May 18th, two famous, photogenic Olympians found themselves almost $300 million richer. A banner day for anyone, and yet they may have felt at least a twinge of regret. Why? They contend that 409A should have made them much richer, to the tune of as much as $1.2 billion.

    At this point, Hollywood has made the story almost old-hat. In December 2002, then Harvard students Tyler and Cameron Winklevoss had an idea. They would develop a web site that connected Harvard students. If successful, they would expand the concept to other campuses. In November of 2003, after several false starts, the Winklevoss twins retained the services of a young, talented programmer to implement their vision. Three months later, without the knowledge of the Winklevoss twins, Mark Zuckerberg gave birth to Facebook. After a successful run at Harvard, the social networking site spread to other campuses, and then took over the world.

    In 2004, the Winklevoss twins (and their company ConnectU) filed suit against Facebook, claiming that Mark Zuckerberg had copied their social networking ideas and source code and used them to create Facebook. In 2008, the parties settled, reportedly for $65 million – $20 million in cash and a specified number of shares of Facebook. The problem was the valuation of Facebook stock at the time of the settlement.

    Around the time of the settlement, Microsoft made an investment in Facebook. This investment valued Facebook at $15 billion. The Winklevoss twins apparently used this valuation, with a per share price of $35.90, when determining that the number of shares provided as part of the settlement.

    How does 409A come in to this story? Like many illiquid startup firms, Facebook made substantial option grants to its employees. For an option to be exempt from Code Section 409A, the option must be granted with an exercise price no less than the fair market value of the underlying stock on the date of grant. Most private start-up companies, particularly ones growing very quickly, regularly engage experienced valuation firm to establish the Company’s fair market value for 409A option grant purposes. Facebook was no exception. In fact, Facebook had come up with an $8.88 per share 409A valuation shortly before the settlement.

    After learning of the 409A valuation, the Winklevoss twins sought to invalidate the settlement agreement. Among other things, the twins argued that Facebook’s failure to disclose the $8.88 409A valuation constituted fraud. Had Facebook disclosed the 409A valuation and had that valuation been used in the settlement, the twins would have ended up with more than four times the number of shares they actually received.

    Ultimately, the twins lost their appeal to invalidate the settlement, which, after Facebook’s recent IPO, left them with stock purportedly worth around $300 million. Had they used the 409A valuation at settlement, however, their settlement stock could have been worth as much as $1.2 billion.

    What’s the moral of this story? Private company stock valuations are inherently speculative, and can be appropriated for purposes other than that for which they are intended. For private companies that issue stock options, 409A can create a paper trail of valuations that can at least raise issues for potential investors, employees, and litigants. Prudence may dictate that companies clearly qualify the limited purpose for which a 409A valuation is obtained (i.e., compliance with 409A). Further, it may be advisable to include confidentiality provisions in stock option agreements and to take such other measures as are necessary to keep private company 409A valuations … well, private.

     

    Other BenefitsBryanCave.com 409A Posts

    Disclaimer/IRS Circular 230 Notice

    Wednesday, October 5, 2011

    I get a lot of clients, family members, friends, acquaintances, and random strangers who find out I’m a lawyer asking me what I think is going to happen to the health reform law when the lower court decisions are reviewed by the Supreme Court. Fortunately, unlike the various real estate, estate planning, or tort questions I get asked (mostly by family), this is a subject that I actually know a little about.(1) I am not a Constitutional Law expert, but it was one of my favorite classes in law school.

    My personal opinion is that I do not think it or any part of it will be struck down. Others disagree, but they are forgetting that health reform has everything to do with growing wheat.(2)

    Back in the 1930’s, FDR kept pushing New Deal reforms through Congress. When the laws were challenged before the Supreme Court, the Supreme Court struck many of them down on the grounds that Congress did not have the authority to enact such laws. FDR threatened to increase the size of the Supreme Court(3) and nominate friendly justices who would uphold the reforms and magically we received Wickard v. Filburn.(4)

    In Wickard, an Ohio farmer, Roscoe Filburn, was challenging part of the Agriculture Adjustment Act of 1938.(5) The Act purported to regulate how much of Roscoe’s farm could be devoted to wheat production. Roscoe planted and harvested significantly more than he was allotted under the Act. He argued that the additional wheat was for his personal use and to feed his livestock. Therefore, he said, this extra wheat growth was merely local in nature and therefore was not part of the “commerce among the several States”(6) that is subject to Congressional regulation.

    The Court in Wickard essentially did away with any prior distinction of local versus interstate activities by pointing out the aggregate effect on interstate commerce that even “local” activities had. This aggregate effect analysis was novel in Commerce Clause analysis and constituted a radical expansion, at the time, of Congressional Commerce Clause authority.(7) From the time of Wickard forward, the Supreme Court has not interpreted the Commerce Clause as imposing any substantial limit on Congress’s authority to regulate economic activity.

    So what does this have to do with health reform? Some of the arguments advanced by opponents to the law essentially state that Congress cannot regulate the purchase of health insurance by individuals and, specifically, cannot force them to buy it.(8) The arguments boil down to a challenge of the scope of Congressional authority to regulate economic activity under the Commerce Clause. While other laws have been struck down before on Commerce Clause grounds,(9) they are the exception rather than the rule. As a result, it would be remarkable, in my view, for the Court to strike the law down. To do so, the Court would have to articulate a reason that the individual mandate beyond the reach of Congress’s authority, which is a feat made difficult by the Wickard decision and its progeny.

    The views of this post do not necessarily reflect the views of Bryan Cave LLP or anyone other than the author.

    Endnotes:
    [1] Bryan Cave has many other talented lawyers who actually know these other areas of law.
    [2] An  oversimplification of history follows.  Please consult your local Constitutional historian for more details.
    [3] The Constitution does not mandate the size of the Supreme Court.  Conventional wisdom (by which I mean, my uninformed speculation) is that the number nine was chosen in case the justices ever had to field a baseball team. This was in the era before bullpen specialization and starters only going 5 innings, so clearly FDR was ahead of his time, from a baseball perspective.
    [4] 317 U.S. 111 (1942).  The connection is somewhat more attenuated than the compound sentence implies.  There were other cases decided in the 1930’s that also took a more expansive view of Congress’s Commerce Clause authority that preceded WickardWickard, however, is generally regarded as one of cases creating the most expansive view of that authority.  Also, no actual magic was used.
    [5] Scintillating reading, as I’m sure you all know.
    [6] Article I, Section 8, Row 37, Seat 134 (OBSVU) U.S. Constitution, aka the Commerce Clause.
    [7] And a real disappointment for Roscoe.
    [8] There are other arguments and ancillary issues that I am not addressing here.  My failure to address them does not mean they are unimportant or irrelevant, just that I don’t think I can hold your attention for much longer.
    [9] See e.g., U.S. v. Lopez, 514 U.S. 549 (1995).
    Tuesday, August 30, 2011

    Arguably, Major League Baseball (“MLB”) offers one of the best pension and healthcare programs in all of sports. Players vest in their pensions after 43 days on the active roster and just one day qualifies a player for lifetime healthcare. Playing isn’t even a requirement, benchwarmers may qualify for benefits as well. After 43 days, players qualify for the minimum benefit of $34,000 per year and those with 10 years of service receive a pension of approximately $100,000 annually. In 2010, the MLB Players’ Pension Plan reported assets of over $1.3 billion for approximately 8,200 participants.

    However, these generous benefits have not always been available. While baseball players first obtained a pension in 1947, some claim the plan was very poor. Pension plan vesting and lifetime healthcare required four years of service. Over the years the MLB Players’ Association negotiated higher benefits and won more concessions in the ’72 and ’81 strikes, including the reduced 43 day pension vesting requirement. But there are 850 former players who retired between 1947 and 1980 with less than four years of service still without pensions or healthcare benefits. In 2002, three of these former players filed a class action lawsuit against MLB demanding pension benefits, but the suit was dismissed.

    According to The New York Times, MLB and the Players’ Association recently agreed to provide payments to these former players. Payments may be up to $10,000 annually and will be based on their length of service. While MLB and the Players’ Association have no legal obligation to pay any additional benefits, they agreed to pay these benefits for the next two years and discuss future payments in collective bargaining. According to Bud Selig, “It’s just the right thing to do.”