TheCorporateCounsel.net

Recently, the IRS issued long-awaited initial guidance – via Notice 2018-68 – on how awards made on or prior to November 2, 2017 can continue to qualify for the “performance-based” exception of Internal Revenue Code Section 162(m) – notwithstanding its elimination by the Tax Cuts & Jobs Act last December. Recall that the result of the tax reform amendments is that companies can’t deduct any “covered employee” pay above $1 million (the definition of “covered employee” was also expanded).

Over on CompensationStandards.com, Mike Melbinger is analyzing all of the “ins & outs” of the new guidance on his blog. Here’s his overview of the framework that will apply:

The guidance answers nearly all of our questions, but it’s not nearly as favorable as we hoped – and not even as favorable as we expected. It contains more than 14 detailed examples, which are more helpful than the text itself. However, the guidance (and the examples) are full of twists and turns and exceptions to the exceptions.

One thing the guidance does make absolutely clear is that the first step in determining whether any payment to any person in any year after 2017 is subject to the draconian limits of Section 162(m) is to determine whether there was a written binding contract in effect on November 2, 2017, which created a legal obligation on the company under any applicable law (e.g., state contract law) to pay the compensation under such contract if the employee performs services or satisfies the applicable vesting conditions. Every one of the many examples provided in the guidance begins with a determination of whether the plan or agreement created a legal obligation on the company. In the examples, some do and some don’t.

The existence of discretion to reduce any promised payment does not always make the full payment subject to the deduction limit of 162(m), but it usually reduces the amount of the payment that is grandfathered. However, the failure, in whole or in part, to exercise negative discretion under a contract does not result in the material modification of that contract.

As we predicted in a few blogs from earlier in the year, the accrued benefits and accounts under non-qualified deferred compensation plans are most likely to qualify for grandfathering protection. In many cases, future payments to the company’s CFO will be grandfathered and remain deductible. However, as we feared, benefits and accounts under plans that reserve to the company the right to amend or terminate the plan prospectively (which includes all well-drafted plans) will only be grandfathered to the extent they are legal obligations as of November 2, 2017.

Art Meyers, Takis Makridis and I will be drilling deeply into this topic (among others) at the upcoming NASPP Conference in our session titled: “Hot Topics in Equity Compensation.” The topic heading is deliberately vague to allow us to cover exclusively issues like this, which have developed or evolved since the deadline for submitting topics and materials for the Conference.

We’re posting memos over on CompensationStandards.com – in our “Section 162(m) Compliance” Practice Area. And stay tuned for more analysis in future issues of our print newsletter: “The Corporate Executive.”

Audit Reports: PCAOB Staff Updates Guidance

Last week, the PCAOB Staff posted this updated “Audit Report Guidance”– updating original guidance that came out in late 2017. The updated guidance doesn’t say anything new about “critical audit matters” – but it gives more instruction for these areas:

– Voluntarily disclosure about audit participants (including sample language)
– Calculating & describing auditor tenure
– Reporting when other regulators require internal control audits
– Explanatory & emphasis paragraphs
– Supplemental & interim financial information
– Special reports

More on “The Mentor Blog”

We continue to post new items daily on our blog – “The Mentor Blog” – for TheCorporateCounsel.net members. Members can sign up to get that blog pushed out to them via email whenever there is a new entry by simply inputting their email address on the left side of that blog. Here are some of the latest entries:

– A Hostile “Token-Over?”
– Activism: Want a Settlement? It’ll Cost a Comp Committee Seat
– ICOs: A Dip in the Action?
– Cybersecurity: Will the SEC’s New Guidance Spur New Disclosures?
– Sustainability: Differentiator for Sell-Side Analysts’ Survival?

– Liz Dunshee