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Section 162(m) and the TCJA

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May 08, 2018 | Barbara Baksa

Section 162(m) and the TCJA

Correction: Before I get to today’s blog entry, I want to note that the email some of you received yesterday about cost basis and tax reform was sent in error. That was an old blog entry about a provision that ultimately was NOT included in the TCJA. As far as I know, nothing is changing with respect to the cost basis of shares sold. Sorry for any confusion.

Okay, now that the correction is out of the way, let’s talk about some of the stuff you’ve been doing for Section 162(m) purposes that you might not have to do in the future.

Section 162(m) has been around since Bill Clinton was president. It might seem like the norm now, but back then, it was a sea change for executive compensation. There are a lot of practices in place today that companies implemented solely for purposes of making sure their performance awards were exempt from 162(m). Now that the exemption has been eliminated, some of these practices might not seem so important.

Discretion and Objectively Determined Targets

Under the old 162(m) exemption, award targets had to be objectively determined and the board/comp committee could not have any ability to discretionarily increase the size of award payouts (discretion to decrease award payouts was permissible). Now that future performance awards can’t be exempt from 162(m), companies theoretically don’t need to comply with either of these requirements.

Not so fast: If the targets are too subjective or payouts are too discretionary, there might not be a mutual understanding of the terms and conditions at the time the award is approved, which would delay the grant date for ASC 718 purposes to the date the award is settled. This would subject the award to liability treatment, something most companies want to avoid.

Pre-established Goals

The old 162(m) exemption also required that the performance goals be pre-established and the 162(m) regs included a myriad of rules governing what was necessary to meet this requirement. For future awards, there’s now theoretically no rush to establish the goals.

Not so fast: Here again ASC 718 is a total buzzkill. There cannot be a mutual understanding of the terms and conditions of a performance award until the performance goals have been established. Thus, waiting to establish award goals will delay the grant date for accounting purposes.

Performance Certification

The old Section 162(m) exemption also required that the comp committee certify that the performance goals had been met, even if it was totally obvious (e.g., in the case of a stock price target). For future awards, this extra step could be eliminated.

Not so fast: Finally, something that isn’t a problem from an accounting standpoint. There’s nothing in ASC 718 that requires certification of performance, nor can I think of any other requirement for this. (Although, it’s possible there’s something I’m missing, so check with your legal advisors. It’s a big world out there with a lot of laws.) But this is still a best practice and protects the company in the event of a dispute, so I don’t expect a lot of companies to drop this procedure, even though it may be merely a formality in some cases.

For Future Awards Only

Remember, none of this applies to currently outstanding performance awards, especially those granted on or before November 2, 2017. The requirements I’ve discussed here are likely stipulated under the terms of the awards and you must continue to operate existing awards in accordance with their terms, even if those terms are no longer necessary under Section 162(m). And, as I discussed last week, modifying performance awards granted on or before November 2, 2017 probably isn’t on the table at the moment.

- Barbara

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