The recent presidential election has tax professionals busy analyzing predicted (and hoped for) tax reform proposals, including the potential reduction in the top marginal rates for individuals. It is unclear whether and when rates will be reduced, and how soon thereafter rates may creep up again, but tax rate proposals invariably lead to discussions relating to the timing of compensation payments.
On November 9, 2016 Andrew Liazos presented at the New York City Bar. He discussed innovative approaches used by public companies during the 2016 proxy season for disclosing executive compensation practices. Andrew addressed the changes in practices for disclosing director compensation in light of director pay lawsuits and CEO pay ratio disclosures that were made by some public companies in advance of the effective date under SEC final rules. Further, he suggested approaches for clawback policies in light of possible changes by the SEC and institutional shareholder services and closed the session with comments on changes to Item 402 executive compensation rules on a going forward basis.
John Roe from Institutional Shareholder Services (ISS) also presented regarding upcoming changes to ISS voting guidelines for the 2017 proxy season. He encouraged public companies to consider the new form of non-GAAP financial disclosures as part of ISS’ pay for performance analysis.
On June 22, 2016, the Internal Revenue Service (IRS) issued proposed regulations under Section 457(f) of the Internal Revenue Code of 1986, as amended (Code). These long-awaited regulations were first previewed in IRS Notice 2007-62. In that Notice, the IRS announced its intention to issue proposed regulations that would harmonize the rules for deferred compensation plans of tax-exempt organizations (and state and local governments) under Section 457(f) with the then-new special rules for all deferred compensation arrangements under Section 409A. After nine years, the proposed regulations now issued address three principal issues, although with some unexpected changes and opportunities.
Read the full article here.
On October 20, 2016, the United States Department of Justice Antitrust Division (DOJ) and Federal Trade Commission (FTC) issued joint Antitrust Guidance to Human Resource (HR) Professionals (the Guidance) involved in hiring and compensation decisions. The agencies issued the guidance to educate HR professionals about how the antitrust laws apply in the employment context.
Read the full article here.
Some companies have considered buying back stock from current and former employees when a liquidity event, such as a sale of the company or an IPO, is unlikely to occur. The attached presentation made by Mr. Liazos before the Executive Compensation Subcommittee of the ABA Tax Section addresses the tax issues to consider when structuring stock buyouts that may be considered to involve a service element.
View presentation slides here.
On September 19 and 27, 2016, the US Department of Justice announced two False Claims Act settlements that required corporate executives to make substantial monetary payments to resolve their liability. How will director and executive liability be impacted by the Yates Memo and False Claims Act in an evolving health care climate?
The very long awaited release of the new proposed regulations for Internal Revenue Code (the ‘‘Code’’) Section 457(f) plans arrived at the end of June and presents welcome and surprising new opportunities with respect to tax-exempt and governmental entities’ ‘‘ineligible nonqualified deferred compensation’’ arrangements.
The Proposed Regulations present some unexpected and surprising opportunities with respect to the ability to electively defer compensation and to have deferred compensation paid out, contingent on a valid covenant not to compete and upon a rolling risk of forfeiture.
Read the full article here to learn more.
The government has published its response to feedback received on its proposals to simplify the taxation of termination payments, expected to come into force in April 2018.
The following table sets out the main proposals and the effect these will have on employers. Importantly, there is no change to the current £30,000 tax free allowance.
Proposal Change Effect 1. Termination payments above £30,000 to be subject to employer National Insurance contributions (NICs). Currently, termination payments above £30,000 only attract income tax, not NICs.
Currently, contractual and non-contractual PILONs are taxed differently.
Contractual PILONs (that are provided for in the employment contract) are treated as earnings and subject to income tax and both employer and employee NICs. Non-contractual PILONs, which are paid in the absence of the contractual right to do so, are subject to income tax, but not NICs.
It isn’t always straightforward to determine whether a PILON is contractual or not given that HMRC can also have regard to the regularity with which the employer pays PILONs.
This clarification is actually welcome given the differences in opinion which can arise when negotiating a settlement agreement. 3. Injury to feelings awards (such as for harassment or discrimination) will not qualify for general injury tax exemptions.
There is an exemption to income tax on termination payments, in addition to the £30,000 threshold, when a payment is made because of death, disability or injury of the employee.
It is currently unclear whether injury to feelings awards qualify for the exemption as there have been contradictory decisions on the point. This proposal would provide additional welcome clarity, but in common with all 3 proposals, means increased cost to employers.
These changes are likely to come into force in April 2018. Given that items 2 and 3 in the table clarify points that are currently argued either way, a prudent employer might want to veer on the side of caution when considering those issues before April 2018.
Lauren Goda (Trainee) contributed to this article.
On June 22, 2016, the Internal Revenue Service (IRS) issued proposed changes to the regulations under the Internal Revenue Code (Code) §409A. The Code intends to clarify or modify a wide range of very restrictive rules pertaining to “nonqualified” deferred compensation plans as well as other types of compensation arrangements that may defer compensation. The proposed changes are designed to benefit taxpayers, with a few intending to close potential loopholes.
The following PowerPoint highlights key points from the proposed regulations and what employers and employees should know and can expect moving forward.
The 2016 proxy season continues to illustrate that compensation issues remain at the forefront, especially where companies have activist investors. Private companies considering going public must wrestle with decreasing valuations, tax issues, stockholder litigation, and Delaware law. Litigation on compensation-related matters continues to evolve, requiring a firm grasp of Delaware law and past and current disclosure practices.
In the following presentation, Andrew Liazos, partner at McDermott Will & Emery, provides an overview of Delaware corporate law as well as analysis of the latest Delaware cases shaping executive compensation practice.
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