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IRS Provides New Guidance Under Code Section 162(m)

In December 2017, under the Tax Cuts and Jobs Act, Congress broadened the $1 million deduction limitation under Code Section 162(m) for a public company’s top executives by, among other things, broadening the scope of “covered employees” and eliminating the performance-based compensation exception. The more restrictive Code Section 162(m) generally applies for tax years after 2017, but certain arrangements in existence on November 2, 2017, may be grandfathered. On August 21, 2018, the IRS issued new guidance on Code Section 162(m) under IRS Notice 2018-68 (the “Notice”). Notably, the Notice provides guidance with respect to the grandfathering relief (including the impact of negative discretion and what constitutes a material modification), and provides guidance on the expanded scope of who is a “covered employee” (and will remain a covered employee). The Notice leaves open for comment several issues, including, the rule which allows certain newly public companies to limit the application… Continue Reading

Employee Compensation and Benefits Changes Under the Tax Cuts and Jobs Act

The following post is a general summary of the changes to the Internal Revenue Code made by the recently enacted Tax Cuts and Jobs Act (the “Act”) that affect employee compensation and benefits: Executive Compensation Updates Loss of Deduction for Compensation in Excess of $1 Million Currently, Section 162(m) of the Internal Revenue Code limits the ability of publicly held corporations to deduct annual compensation paid to a “covered employee” in excess of $1 million, with an exception to this limit for certain performance-based compensation. Beginning on and after January 1, 2018, the Act amends Code Section 162(m) to eliminate the exception for “qualified performance-based compensation” (which includes stock options, stock appreciation rights, and compensation paid upon the attainment of pre-established performance goals) and commissions. There is limited grandfathering relief available under the Act that preserves the deductibility of existing arrangements that pay out after 2017, provided the “written binding… Continue Reading

IRS Releases Guidance on Applicability of Code Section 162(m) to CFOs of Smaller Reporting Companies

The IRS recently released a Chief Counsel Memorandum in which the IRS concluded that the CFO of a public company, which is eligible to report under the SEC’s executive compensation disclosure rules as a “smaller reporting company,” may be subject to Code Section 162(m)’s $1 million compensation deduction limit. The limit under Code Section 162(m) applies to “covered employees,” which are a public company’s CEO and certain other highly compensated executives whose compensation is required to be disclosed pursuant to the SEC’s executive compensation disclosure rules. For larger public companies, this means the limits of Code Section 162(m) generally will apply to its CEO and its three most highly compensated executives, other than its CEO. The company’s compensation deduction for its CFO is not limited by Code Section 162(m) because the CFO’s compensation must be disclosed due to his or her position, not due to the compensation level. However, for… Continue Reading

Final Regulations Issued Under Code Section 162(m)

The IRS recently issued final regulations regarding the deduction limitation for certain employee compensation in excess of $1 million under the Internal Revenue Code. Proposed regulations were issued on June 24, 2011. The final regulations generally adopt the proposed regulations with some modifications. Code Section 162(m) generally imposes a deduction limit of $1 million on compensation paid by a publicly held corporation during any tax year to a “covered employee,” which generally includes the CEO and the three highest paid officers other than the CEO and CFO. However, the deduction limitation does not apply to qualified “performance-based compensation,” including stock options and stock appreciation rights (“SARs“). The final regulations clarify that for stock options and SARs to qualify for the exception, the requirement to specify the per-employee limitation in the plan is satisfied if the plan specifies an aggregate maximum number of shares with respect to which stock options, SARs,… Continue Reading

Reminder: 162(m) Performance-Based Compensation Plans Must be Re-Approved by Shareholders Every Five Years

As another proxy season gets underway, public corporations should consider whether their performance-based equity or incentive compensation plans should be submitted for shareholder approval at the corporation’s next annual meeting. Generally, Code Section 162(m) requires a plan’s performance goals to be disclosed to and approved by the corporation’s shareholders at least every five years in order for performance-based awards granted under the plan to be exempt from Code Section 162(m)’s deduction limits on executive compensation. Plans that were last submitted for shareholder approval in 2010 should be included in this year’s proxy statement and submitted for re-approval by the corporation’s shareholders.

Dividends and Dividend Equivalents May be Performance-Based Compensation under Code § 162(m) Even if Received Prior to Vesting of Restricted Stock or Restricted Stock Units

The IRS has confirmed that dividends and dividend equivalents relating to restricted stock and restricted stock units (RSUs) are separate grants from the restricted stock and RSUs, and must separately satisfy performance-based compensation requirements in order to avoid being counted toward the $1 million deduction limit on compensation under Internal Revenue Code § 162(m). For example, if an employee’s right to dividends and dividend equivalents vests and becomes payable only upon satisfaction of the same performance goals that apply to the related grants of restricted stock and RSUs, then the dividends and dividend equivalents are excluded from compensation for purposes of applying the $1 million deduction limitation. However, if an employee receives dividends and dividend equivalents at the same time that dividends are paid on the company’s common stock prior to vesting of the restricted stock and RSUs and achievement of related performance goals, then these amounts are not qualified… Continue Reading

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