Troutman Sanders' "162(m) Proposed Regulations: Six Lessons and a Handful of Planning Opportunities" very effectively explains each of the key takeaways from the recently proposed regulations to implement the Tax Cuts & Jobs Act-triggered changes to IRC §162(m), and suggests actions companies may wish to consider to mitigate the adverse impacts.
Takeaways and considerations include:
- §162(m) Will Apply to More Companies
- Affiliated groups with multiple public companies within the group - such as a parent with listed securities and a subsidiary with publicly traded debt - may want to consider, e.g., having the CEO and CFO of the parent also serve in those roles of the sub.
- §162(m) Will Apply to More Employees
- Companies may want to consider appointing fewer executive officers to reduce the number of covered employees.
- In the M&A and other covered transaction context (see our prior report here - "Acquisitive Companies"),ensure all covered employees of a target company (including former employees still owed compensation) are properly identified as covered employees and factored into the transaction costs.
- §162(m) Will Apply to More Compensation
- Reevaluate and potentially revamp (with due consideration for investor and proxy advisor-related optics and implications) incentive plans that were designed to meet the old 162(m) performance-based exception except to the extent any arrangements may be grandfathered.
- Consider whether spreading out payments over more years in view of the annual $1 million/tax year deductibility cap may be beneficial with due consideration for IRC Section 409A and other factors.
- Consider other types of equity awards in view of the elimination of the performance-based compensation exception, which favored stock options.
- New Public Companies Will Not Have Transition Relief
- Companies planning to go public should consider the potential immediate cost associated with the elimination of the 3-year transition relief previously afforded to new public companies.
- Grandfather Rules Are Clarified but Still Require Legal Judgments
- Grandfathered arrangements should be identified and tracked so that they are not inadvertently materially modified.
- The Interplay Between 409A Payment Rules And 162(m) is Clarified
- Companies have until December 31, 2020 to amend plans that expressly required deferral of payments based on the former 162(m) deductibility to grandfathered amounts consistent with the new regulations and 409(A).
The public comment period on the proposed regulations is open through the date of a public hearing scheduled for March 9. Companies reportedly can rely in good faith on the proposed regulations until they are finalized.
See our prior report: "IRC Section 162(m): Executive Compensation Design & Disclosure," and additional information & resources on our Executive Pay page under Tax Reform-Related. This post first appeared in the weekly Society Alert!