October 26, 2018

On August 21, 2018, the Internal Revenue Service released Notice 2018-68 which provides guidance regarding the changes made to Section 162(m) of the Internal Revenue Code by the Tax Cuts and Jobs Act of 2017, which is effective for tax years after January 1, 2018.  Section 162(m) limits the amount of tax-deductible compensation that “publicly held” corporations can pay certain executives to $1 million, and the changes to Section 162(m) under the 2017 Tax Act, as clarified by the Notice, are substantial. This Legal Update is a reminder that publicly held corporations, particularly those with tax and fiscal years ending December 31 that are contemplating acquisition transactions or year-end compensation planning, should consult with their legal, accounting and compensation advisers to address the new tax rules under Section 162(m), and consider appropriate design changes to existing compensation programs that may mitigate the impact of the new law. The following are some of the significant changes to Section 162(m):

  • The definition of “Covered Employee” now includes any person who served as the CEO or CFO at any time during the taxable year, and the three other most highly compensated officers.
  • Once an individual become a covered employee for any taxable year beginning after December 31, 2016, that individual will always remain a covered employee, even after termination of employment.
  • The exception under Section 162(m) for qualified performance-based compensation and commissions has been eliminated so that all compensation paid to a covered employee in excess of $1 million is non-deductible, including post-termination, severance, deferred compensation and payments from nonqualified plans.
  • Compensation payable under a written, binding contract that was in effect on November 2, 2017 is exempt from the new Section 162(m), but under very strict standards, including that the written, binding contract is not materially modified or renewed after November 2, 2017.

For more information, including a summary of the IRS Guidance, please see the attached News Alert.


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