Under both the House and Senate versions of the Tax Cuts and Jobs Act, Internal Revenue Code Section 162(m) would be modified to expand the scope of companies and executive officers subject to the limitation on deductibility of compensation over $1 million, as well as to eliminate the exception to non-deductibility under Section 162(m) for qualified performance-based compensation. The changes would be effective for tax years after 2017, but under the Senate bill, binding contracts in effect on November 2, 2017 would be grandfathered if not materially modified on or after that date).  Each version of the Tax Cuts and Jobs Act would also generally lower the corporate tax rate to 20%.  The House bill reduces the corporate tax rate beginning in 2018 and the Senate reduces it beginning in 2019.

Taken together, publicly traded corporations currently subject to Section 162(m), as well as corporations with publicly traded debt subject to Section 15(d) of the Exchange Act, will become subject to Section 162(m) if either bill becomes law. These corporations may want to consider whether to accelerate into 2017 the vesting and payment of compensatory payments that otherwise would have been made in 2018 or future years.  This acceleration of payment may (1) enable the corporation to take a higher deduction in 2017 than would be available in a tax year with a lower corporate tax rate, and (2) preserve the deductibility of amounts that would otherwise be non-deductible under Code Section 162(m).

While the first rationale would be relevant for payments made by all corporations, the second rationale would be particularly relevant for:

  1. payments to a corporation’s chief financial officer, who currently is not subject to the limitation on deductibility under Section 162(m), but would become a Section 162(m) “covered employee” under the tax reform proposals;
  2. payments to officers of corporations with publicly traded debt subject to Section 15(d) of the Exchange Act, which would become subject to Section 162(m) under the tax reform proposals even in the absence of publicly traded stock subject to Section 12 reporting; and
  3. payments to any executive officer who was a Section 162(m) “covered employee” during 2017 (in respect of compensation through December 31, 2016) and who would no longer be an executive officer as of the end of 2017, whether by reason of termination of employment or employment reclassification or demotion. A payment to such an executive officer in 2017 would make sense because each tax bill would expand the scope of “covered employees” to any employee who was a covered employee for any preceding taxable year beginning after December 31, 2016 and, therefore, even though the executive officer will no longer be an executive officer, under the bills, he or she would continue to be a covered employee.

By contrast, for an executive officer who is expected to continue his or her position after the end of 2017, it may not be possible to accelerate payments of compensation intended to qualify for the Section 162(m) performance-based compensation exception into 2017 while preserving non-deductibility under Section 162(m). For example, it is impossible as a practical matter for the compensation committee to satisfy the requirement to certify in writing the achievement of the underlying performance criteria if performance cannot be measured in 2017 (such as where performance is based on audited financials or measured on a relative basis against a published index or peer group) or if the compensation committee is unable to meet prior to year-end.

In addition to the enormous uncertainty surrounding the final form of any revisions to Section 162(m) under tax reform, a corporation considering accelerating payments to maximize deductibility of pay should confirm that the acceleration is permitted under the underlying benefit plans and agreements and is possible without additional penalty under Code Section 409A. The corporation should also consider disclosure implications and potential shareholder reactions as well as any impact on its retention and incentive needs. Lastly, the accounting impact of an acceleration of payments should be reviewed.

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Photo of Andrea Rattner Andrea Rattner

Andrea S. Rattner is a partner in the Tax Department and member of the Employee Benefits & Executive Compensation Group. For more than 30 years, her practice has focused on a broad range of executive compensation and employee benefits matters, advising clients on…

Andrea S. Rattner is a partner in the Tax Department and member of the Employee Benefits & Executive Compensation Group. For more than 30 years, her practice has focused on a broad range of executive compensation and employee benefits matters, advising clients on an ongoing basis as well as in the context of corporate transactions and other transformative and unique situations. Her clients include public and private companies, boards of directors, compensation committees and senior executives in a broad range of industries. Andrea has been involved in Firm management for many years, having served as a member of the Executive Committee and a former chair of the Tax Department.

Andrea counsels clients with respect to the tax, securities, corporate governance, stock exchange, ERISA and other implications affecting executive compensation arrangements. Andrea regularly provides advice regarding equity arrangements (such as stock options, restricted stock, RSUs, LLC/partnership interests and phantom equity), employment agreements, change-in-control agreements and all other types of compensation arrangements (including incentive awards, SERPs, deferred compensation and “409A” covered and exempt arrangements).

She counsels clients on benefits and compensation matters arising in all types of corporate transactions, including mergers & acquisitions, spin-offs, restructurings, joint ventures, debt and equity offerings and bankruptcies. In numerous transactions, she has addressed the treatment of stock options and other equity awards, change-in-control and “golden parachute” tax issues, severance obligations and separation agreements, the negotiation of new employment agreements and other executive arrangements, retention and other bonus plans, benefit plan liabilities, COBRA, PBGC-related issues and post-closing benefit plan and compensation structures and integration.

Andrea also advises clients on compliance with ERISA, the Internal Revenue Code, and other laws affecting employee benefit plans, as well as plan design, administration, termination, fiduciary duty issues, prohibited transactions, qualification requirements and other matters concerning pension, profit-sharing, employee stock ownership, 401(k), and other types of plans. She has extensive experience with respect to the legal consequences relating to the use of employer stock in tax-qualified plans such as ESOPs, profit-sharing, stock bonus and pension plans.

Andrea has been lauded by various legal rankings directories, including Chambers USA and Legal 500, noting that her “depth of knowledge and involvement in this practice area, [including] the business and trends, is terrific.” She is also recognized for having an “excellent understanding of the business community” and for being “pro-active in keeping clients up to date.” She writes and lectures frequently on employee benefits and executive compensation matters and is a co-editor and chapter author of Executive Compensation (Law Journal Press). Since 1993, she has served as an adjunct professor on the faculty of Cornell University (New York State School of Industrial & Labor Relations-Management Programs). Andrea is also active in Proskauer’s relationship with the Women Corporate Directors (WCD), the only global membership organization of its kind focused on helping women obtain and succeed in board positions.