Pubic companies that sponsor nonqualified deferred compensation plans with grandfathered benefits will want to be aware of helpful payment guidance in the Internal Revenue Code Section 162(m) final regulations. The final regulations, which were published in the Federal Register on December 30, 2020, implement amendments made to Section 162(m) by the Tax Cuts and Jobs Act (TCJA). The regulations adopt the Section 162(m) proposed regulations issued on December 20, 2019, with certain modifications.
Author: Christine M. Kong
Christine Kong is the go-to adviser for corporate and tax-exempt entities on retirement, employee-benefit and executive-compensation plans, particularly in the context of corporate transactions. Clients value her exceptional breadth and depth of knowledge. In addition to advising on employee benefits in corporate transactions, Chris assists employers with the design and implementation of new plans, plan mergers, and plan terminations. She also addresses operational compliance issues for employers and represents employers when their employee benefit plans are the subject of federal audit or investigation.
409A/162(m) Payment Delay Provisions
Public companies that sponsor nonqualified deferred compensation plans that require Internal Revenue Code Section 162(m) payment delays may want to consider whether removing the payment delay provision from a plan is warranted in light of the 2017 Tax Cuts and Jobs Act (TCJA) changes to the definition of a “covered employee.” The December 31, 2020 deadline is approaching to amend plans to remove Section 162(m) payment delays without the change being considered an impermissible acceleration of payment under Internal Revenue Code Section 409A.
Section 162(m) imposes a $1 million deduction limit on remuneration paid to a “covered employee.” The TCJA changed the Section 162(m) rules so that an individual’s status as a “covered employee” will continue after he or she terminates from employment with a public company. Prior to the TCJA change, an individual ceased to be a covered employee for purposes of Section 162(m) when he or she terminated employment. This change to the “covered employee” definition applies to tax years beginning after December 31, 2016. As a result, covered employees identified for a public company’s 2017 tax year (in accordance with the pre-TCJA rules for identifying covered employees) continue to be covered employees for the company’s 2018 tax year and thereafter.
IRS Compliance Strategy: Excess Executive Compensation Paid by Tax-Exempt Organizations
Tax-exempt organizations that pay excess parachute payments or remuneration in excess of $1 million for a taxable year to “covered employees” need to be aware of a recently announced IRS compliance strategy.
On November 5, the IRS’s Tax Exempt & Government Entities Division (TE/GE) released its Fiscal Year 2021 program letter and new compliance webpage. According to the webpage, one area of TE/GE focus for the 2021 fiscal year is compliance with Internal Revenue Code section 4960. Section 4960 imposes a 21 percent excise tax on “excess remuneration” (remuneration that exceeds $1 million for a taxable year) and “excess parachute payments” paid by an applicable tax-exempt organization to certain “covered employees” during a taxable year. Section 4960 applies to taxable years beginning after December 31, 2017.
Calculating Plan Loan Limits under the CARES Act: Application of the One-Year Lookback
The Coronavirus Aid, Relief, and. Economic Security (CARES) Act temporarily increases the plan loan limit for loans to qualified individuals (as defined below) from defined contribution plans, such as 401(k) plans and 403(b) plans. This is generally good news for employees, but care should be taken when plan sponsors and plan recordkeepers calculate the loan limit because the one-year “lookback” continues to apply.