We previously blogged about how the Tax Cuts and Jobs Act (the Act) amended Internal Revenue Code Section 162(m). In general, the amended Code Section 162(m) restricts the ability of publicly traded companies to recognize a tax deduction for amounts paid to “covered employees” in excess of $1 million. It does this primarily by expanding the groups of individuals who are classified as covered employees and restricting the scope of the arrangements that are exempt from the $1 million deduction limit. The Act left many questions unanswered, and the IRS recently answered some of those questions by publishing transition guidance in Notice 2018-68 (the Notice). The most notable takeaway from the Notice is that the ability of arrangements to be grandfathered under prior Code Section 162(m) is more limited than many practitioners had hoped for.
The guidance from the Notice will require public companies to evaluate both the design and administration of their executive compensation plans. Doing so is important both to preserve the tax deductibility of grandfathered amounts and to consider the best way to align executive compensation with increasing shareholder value in the new tax environment. Companies also will need to be able to explain these issues as part of their compensation discussion and analysis in their proxy statements. To manage these issues, public companies should consider taking the following actions with respect to their executive compensation plans: Continue Reading