December 19, 2019

Revised Proposed Regulations on Section 162(m)

By Ted Ginsburg, Director, Tax & Business Services

Related Services Tax & Business, Corporate Tax

Revised Proposed Regulations on Section 162(m) Tax & Business

On December 16, 2019, the Internal Revenue Service issued revised proposed regulations regarding the deductibility of officers’ compensation by a publicly traded employer under Section 162(m). The revised proposed regulations take into account the terms of the 2017 Tax Cuts and Jobs Act (TCJA). These proposals may be relied upon, but they must be relied upon in their entirety.

BACKGROUND

Section 162(m) generally imposes a $1 million limitation on the compensation deduction that a publicly traded employer can use, related to certain covered employees (principal/chief executive officer, principal/chief financial officer and the three other executive officers whose compensation is reported on the employer’s annual proxy statement (Def 14A).

HIGHLIGHTS OF THE PROPOSED REGULATION

  • An employer will not be treated as being publicly held if its obligation to file reports under Section 15(d) of the Exchange Act is suspended.
  • When a privately held employer becomes public, Section 162(m) will apply for the tax year ending on or after the date that the employer becomes publicly held. The employer is considered to become publicly held on the date that its registration statement becomes effective under the Securities or the Exchange Act.
  • Compensation will be measured as of the employer’s taxable year rather than its SEC reporting year.
  • Compensation includes amounts paid to a person other than the covered employee, including payments due to the employee’s death.
  • The TJCA provides certain rules governing excluded payments under written binding contracts in effect on November 2, 2017. The following changes are found in the revised proposed regulation:
    • Payments made under contract which exceed the amounts provided in the contract will not be grandfathered.
    • If an employer has the ability to recover payments made to an executive, only the amount that the employer cannot recover will be subject to the grandfathered provisions.
    • Severance payments will be grandfathered only if the employer is contractually obligated to pay severance under the grandfathered agreement.
    • If an employment contract is materially modified after November 2, 2017, all payments made after the date of modification are no longer grandfathered, even though the amount of the particular payment did not change.
    • Compensation arising from the vesting of restricted property or the exercise of a stock option/stock appreciation right will not be considered a material modification.
    • Certain amendments to non-qualified deferred compensation agreements relating to the timing of payments made by the employer will not be considered material modifications for grandfathering purposes; some of these amendments must be made by December 31, 2020.

MARCUM RECOMMENDATION

Amendments to employment agreements in effect on November 2, 2017, should be carefully reviewed to determine the impact the changes will have on the status of the agreement.

A public hearing on the proposed regulation will be held on March 9, 2020. Written comments can be provided through the Federal eRulemaking Portal at www.regulations.gov (indicate IRS and REG-122180-18) until February 18, 2020.

Marcum’s compensation and benefits advisors will keep you posted on the status of this proposed regulation.