On June 21, 2016 the IRS issued proposed regulations to modify and clarify existing regulations under Section 409A of the Internal Revenue Code. Many of these changes resulted from practitioner comments and the IRS’ experience with Section 409A after issuing the final regulations. Overall, most of the proposed changes are favorable, and may provide some planning opportunities.
On June 21, the IRS issued long awaited proposed regulations under Section 457 of the Internal Revenue Code that affect a broad range of compensation arrangements at tax exempt organizations. If a compensation arrangement is subject to Section 457(f), the employee is immediately taxed upon earning a vested right to receive “deferred compensation” that might not be paid until years later. These regulations address important issues under Section 457(f) that were identified by the IRS back in 2007, including whether severance pay is subject to Section 457(f), if changes to a vesting schedule could delay when deferred compensation is taxable and if covenants not to compete would be respected as bona fide vesting conditions
A severance pay arrangement will be treated as deferred compensation under Section 457(f) under the proposed regulations unless (1) the total amount of severance pay is limited to two times total annual compensation; (2) payments are completed within two full calendar years following termination of employment; and (3) the events triggering the right to severance pay are limited to a bona fide involuntary termination, which may include certain types of “good reason” terminations of employment by an employee and failure to renew an employment agreement.
There have been questions as to whether vesting conditions imposed after a compensation arrangement has been established will be respected for tax purposes. In that event, the time for income taxation under Section 457(f) is delayed until the new vesting requirement is met. If certain requirements are met, the proposed regulations provide that additional vesting conditions will be taken into account when determining the time of taxation under Section 457. These conditions include that the deferred amount subject to a new vesting date has to be more than 25 percent greater than the old amount with the former vesting date, the delay in vesting has to be at least two years (except in the case of death, disability or a qualifying involuntary termination), and the change in vesting is entered into sufficiently in advance of the original vesting date under special timing rules.
The proposed regulations also allow for noncompetes to be used as vesting conditions under Section 457(f), but only if:
There had been concern that the IRS might not allow any form of noncompete to be a substantial risk of forfeiture under Section 457(f).
These regulations are generally scheduled to go into effect as of January 1 of the calendar year after being finalized. These rule [...]
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The IRS and US Department of Treasury have issued final and temporary regulations which address benefit and self-employment tax issues regarding partners in a partnership which is the sole owner of a second, wholly owned legal entity. The regulations are intended to clarify that where the partners are separately working for the second legal entity, such individuals may not be treated as employees, and must be treated as self-employed individuals for both self-employment and employee benefit plan purposes. As a result, the partners may not be provided the tax benefits provided employees with respect to benefit plans such as cafeteria plans, parking and transit benefits, health benefits and health insurance.
In the corporate transactions context, it is increasingly important to be familiar with the key tax considerations relating to mergers and acquisitions, and how to minimize tax risks in such transactions.
In the following presentation, Andrew Liazos, partner at McDermott Will & Emery, provides an overview of executive compensation tax issues to limit the effect of “golden parachute” taxes and avoid adverse deferred compensation tax results under Section 409A of the Internal Revenue Code.
On April 29, 2015, the Securities and Exchange Commission (SEC), by a three-to-two vote, proposed new rules that would prescribe new mandatory pay-versus-performance disclosure. The proposed rule would include specific information showing the relationship between executive compensation ‘‘actually paid’’ and financial performance of the registrant.
Click to read the full article from Pension & Benefits Daily.
Review our full presentation SEC Proposal on New Pay versus Performance Disclosure Rules here.
Executive compensation, corporate governance, shareholder engagement and other rule changes and rulemakings for public companies are highlighted in the 2016 Proxy Season Checklist. The list discusses important developments that will affect the upcoming and future proxy seasons, and offers suggestions on how to prepare for them.
To avoid tax reporting and withholding penalties as 2015 draws to a close, employers need to properly plan and check their reporting for employees under non-qualified deferred compensation, fringe benefits, health benefits or other remuneration. Year-end planning for employers is important, because employee information reporting, including both Form W-2 and the new Affordable Care Act (ACA) Forms, is now subject to significantly increased penalties.
Recent case law suggests that corporations should consider implementing limits on director equity awards similar to those implemented for executives. The current practice is to include director equity awards in stockholder approved “omnibus” stock plans that also cover executive officers and key employees. However, unlike for certain executives, there are no regulatory requirements regarding limits on directory equity compensation.
Two recent cases brought by shareholders arguing that corporations essentially overpaid their directors are leading companies to revisit the practice of not having any limits on director equity compensation. Both cases survived motions to dismiss; one case is settled while the other remains active. In an article published by Bloomberg BNA, Andrew C. Liazos, partner at McDermott Will & Emery, noted that additional cases are being filed regarding director compensation using a variety of state corporate law claims.
Given the case law and threat of additional litigation, corporations should begin designing limits for director equity compensation. For more discussion on this topic, read the attached presentation co-authored by Mr. Liazos.
As previously reported, California’s Healthy Workplaces, Healthy Families Act of 2014 (California’s Sick Leave Law) took full effect on July 1, 2015, although some provisions were effective as of January 1, 2015. The new law generally requires most employers to allow employees to accrue paid sick leave. This On the Subject discussed requirements employers must meet, including Assembly Bill 304, which amends California’s Sick Leave Law to make immediate changes.
In yet another divisive 3-2 vote along party lines, on August 6, 2015, the U.S. Securities and Exchange Commission (SEC) adopted final rules requiring public companies (other than emerging-growth companies, smaller reporting companies and foreign private issuers) to disclose the ratio of the compensation of its chief executive officer to the median compensation of its employees (CEO Pay Ratio). The new rules were mandated under Section 953(a) of the Dodd-Frank Wall Street Reform and Consumer Protection Act.
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