The leading association for the stock and executive compensation profession
Join a professional community 6,000+ members strong
Continue your investment in your professional development and community
Our member care center is here to assist you
Country-specific guidance for stock plan design and administration
Connect with a chapter in your area
Learn more about and engage your peers
Attend an NASPP event for unbeatable professional development and networking
Ask, find and provide answers to burning industry questions
Professional development to keep you at the top of your game
Expert industry perspectives and guidance for your daily work
Enrich you career and discover new opportunities
The 26th annual event comes to San Diego this September 25-28!
Normally, I only post one blog entry during holiday weeks, but in honor of IRS Notice 2018-68, I’m posting two blog entries to celebrate Labor Day Week 2018. Today I discuss what constitutes a material modification.
As I noted in my blog on Wednesday, compensation that is paid pursuant to a written binding contract that was in place on or before November 2, 2017 is grandfathered from the amendments to Section 162(m) implemented under the Tax Cuts and Jobs Act.* I noted one rub with this on Wednesday, here’s another: the compensation is grandfathered only so long as the arrangement under which it is paid isn’t materially modified after November 2, 2017.
Which brings us to our next question.
Notice 2018-68 defines a material modification as an amendment that increases the compensation payable to the employee. In terms of equity awards, it seems clear that any amendment that increases the number of shares payable under the award or that lowers the price that must be paid for those shares will be considered material, and, thus, will cause the arrangement to become subject to Section 162(m).
You might not think of acceleration of vesting as increasing the compensation paid under an award, but the IRS appears to disagree. Notice 2018-68 specifically states that a modification that accelerates payment of compensation is material unless the amount of compensation paid is reduced to reflect the time value of money (which I have never seen done for a stock award).
Maybe. On this topic, Notice 2018-68 says that modifications to defer payment of compensation will not be treated as material, provided that the additional compensation paid as a result of the deferral is based on a reasonable rate of interest or the rate of return on a predetermined actual investment.
Assuming that the company’s stock qualifies as a “predetermined actual investment,” it seems like a deferral would not be considered a material modification. But there aren’t any examples in the notice that make this clear, so check with your tax advisors before assuming this is the case.
On a positive note, the notice provides that amounts paid prior to the material modification are still grandfathered, even though amounts paid after the modification will no longer be exempt from Section 162(m). Also, failure to exercise negative discretion does not result in a material modification (but this may not be all that helpful since awards subject to negative discretion may not be grandfathered at all—see “The Section 162(m) Grandfather and Negative Discretion”).
* Note that compensation that was subject to Section 162(m) pre-TCJA will still be subject to it post-TCJA, even if it might seem like it otherwise qualifies for the grandfather. This shouldn’t come as a surprise to anyone.
The Section 162(m) Grandfather and Negative Discretion
As I noted in my blog last week, IRS Notice 2018-68 provides guidance on application of...Read More
It's Here! Guidance on Section 162(m) and the TCJA
As my readers know, because I have blogged about it Read More
Section 162(m) and the TCJA: Part Two
Last week, I blogged about practices implemented to ensure that performance awards to exe...Read More
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 ent...Read More
Use Caution When Modifying Options and Performance Awards
We all know that modifications to equity awards have consequences. At the moment, however, modifying outstanding stock options and performance awards might have more significant implications tha...Read More