As my readers know, because I have blogged about it ad nauseum, the Tax Cuts and Jobs Act amended Section 162(m) to cover additional companies and employees and to eliminate the exception for performance-based compensation. Last week, the IRS and Treasury issued Notice 2018-68 to provide guidance on who is a covered employee and which compensation is still exempt from 162(m) pursuant to the grandfather provision included in the TCJA.
Here are five things to know about the notice:
1. You might be surprised by who is now covered under 162(m). The notice clarifies that officers don’t have to be employed as of the end of the year to be covered and don’t have to be named executive officers for proxy disclosure purposes.
2. A written binding contract is one that legally obligates the company to pay the compensation if the employee performs the required services or satisfies the applicable vesting conditions. This is important because only compensation paid pursuant to a written binding contract in effect as of November 2, 2017 can be exempt under the grandfather provision (and then only if it would have been exempt from 162(m) pre-TCJA).
3. For grandfathered compensation to continue to be exempt, the arrangement under which it is paid can’t be materially modified after November 2, 2017. The notice points out that the language on this in the TCJA is almost identical to the original grandfather provision included in Section 162(m) when it was adopted back in 1993. Thus, there is already guidance as to what constitutes a “written binding contract” and a “material modification” in Treas. Reg. 1.162-27(h).
4. A material modification is one that increases the amount of compensation payable to the employee. That seems simple enough, but as with everything equity compensation related, I’m sure it’s a lot more complicated. The notice includes 11 examples of compensation that might be eligible for the grandfather provision but none of them include examples of modifications to equity awards.
5. There are still plenty of unresolved questions. For example, as noted in a memo by McDermott Will & Emory, it is still unclear how the grandfather provision applies to performance-based compensation that is subject to negative discretion (i.e., where the board can discretionarily reduce the payment under the arrangement). Luckily, Stephen Tackney from the IRS Office of Chief Counsel will be speaking with two panels at this year’s NASPP Conference, which gives us another chance to get some answers.
The notice requests comments on a number of aspects of Section 162(m); comments can be submitted through November 9. And, of course, you can comment directly to Stephen Tackney in person at this year’s NASPP Conference.
For more information and updates, see the NASPP Development “IRS Issues Guidance on Section 162(m).” As we receive additional law firm memos, they will appear under the “Related Articles” section of the Development.
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