REITs Executive Compensation Guide

Bonuses and certain types of equity incentive awards may also be deferred compensation under Section 409A, depending on the terms of the arrangements. Restricted stock, operating partnership profits interests (e.g., LTIP units) and stock options and SARs that meet certain requirements generally are exempt from Section 409A under current Section 409A guidance, but RSUs and phantom equity awards, as well as cash bonuses, will be subject to Section 409A unless they qualify as “short-term deferrals.”

PRACTICE POINT: Special care must be taken when an award provides special treatment upon “retirement,” as the award (or the portion of the award that would not be forfeited upon retirement) will generally no longer be considered subject to a substantial risk of forfeiture once the retirement condition is satisfied, even though the company might not consider the award “vested” unless and until the employee actually retires. Employers are often surprised to learn that this can cause awards issued to employees who are retirement eligible (or who become retirement eligible during the award term) not to qualify as short-term deferrals.

Generally, awards will only qualify as short-term deferrals if payment will, in all events, be made (or, in the case of stock-settled RSUs or stock-settled phantom equity awards, stock will, in all events, be issued) no later than the 15th day of the third month after the later of the company’s or the individual’s tax year in which the right to the payment or issuance of stock is no longer subject to a substantial risk of forfeiture. This is one reason many annual bonuses are payable no later than March 15th of the year after the bonus is earned. If the short-term deferral exemption does not apply, RSUs and phantom equity arrangements, as well as cash bonuses, must comply with Section 409A in form and operation. This means payment terms need to be limited to permitted Section 409A payment times or events and changes to payment timing may only be made in limited circumstances, following specific rules under Section 409A.

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