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IRS Aims to Curb Workaround of Limit on Executive Pay Tax Break

Public companies would have a harder time evading a stricter limit on deductions for compensation paid to top executives under an IRS proposal. The proposed regulations (REG-122180-18) implement a 2017 tax law provision that expanded the scope of tax code Section 162(m), which prevents public companies from getting a tax deduction for executive compensation exceeding $1 million. The rules target a workaround under which corporations could potentially skirt the limit by paying certain top executives part of their compensation through a partnership.

McDermott’s Andrew C. Liazos contributes to a Bloomberg Law article that takes a look at how the IRS is working to curb the workaround of the limit on executive pay tax break.

Access the full article.

Originally published on Bloomberg Law, December 2019




A New Landscape for Businesses with California Operations, Thanks to A.B. 5

This month, Assembly Bill 5 (A.B. 5) was signed into California law. A.B. 5 codifies the “ABC Test”—used to determine if a worker is an independent contractor—which is broader, harsher and more inclusive than the common law test with which most businesses are familiar.

A.B. 5 appears to be the death knell of convenience for retaining contractors in the Golden State, as well as the advent of a new wave of wage and hour litigation.

Access the full article.




Employment, Benefits and Compensation Forum: Control Your Own Headlines

In today’s high-stakes environment, in-house counsel and HR professionals are often on the frontlines, responding to headlines that threaten business and reputational objectives.

Join McDermott Will & Emery’s Employment and Employee Benefits practice groups at a half-day forum in our Chicago office on Oct. 10. This forward-looking program is designed to drive conversation around emerging trends to help employers craft their own narrative, instead of being held captive by it.

See full event details and register here.




3 Aspects of Executive Agreements that Need an Upgrade

Executives are no longer reluctant to lawyer up. News reports on executive/employer contretemps at Papa John’s, Barnes & Noble, Uber and other companies have drawn press attention in the past year; countless other executive/employer disputes have flown below radar.

Underlying these controversies is the executive’s employment agreement, typically the most high-stakes and closely negotiated employment agreements to which companies will contract. Yet, these agreements often contain less clarity and less certainty than either executives or their employers need. Indeed, there appear to be three areas where these contracts could and should be upgraded. Let’s look at each.

Access the full article.

Originally published by Law360, February 2019.




Fridays with Benefits Webinar | All in the Family: 21st Century Benefit Plan Strategies for Family-Owned Businesses

Those were the days: when family-owned businesses paid only passing attention to the business value of providing tax-efficient—and incentivizing—benefit plans and compensation options. Tomorrow, Employee Benefits partner Todd Solomon and Private Client partner Bobbi Bierhals join host Judith Wethall during our Fridays with Benefits webinar series to discuss benefit plans and compensation strategies for modern family-owned companies and family offices.

Join our lively 45-minute discussion, where we’ll discuss the following points:

  • Benefit plan options and unique challenges for family-owned companies and family offices
  • The latest compensation strategies to incentivize employees
  • Options for providing value without a direct ownership stake in the family-owned company

Friday, June 7, 2019

10:00 – 10:45 am PST
11:00 – 11:45 am MST
12:00 – 12:45 pm CST
1:00 – 1:45 pm EST

Register Now.




Camp Tax Reform Proposal Could Impact Executive Compensation

On February 26, 2014, U.S. House of Representatives Committee on Ways and Means Chairman Dave Camp (R-MI) released the proposed Tax Reform Act of 2014 (the Camp Proposal), which would simplify the Internal Revenue Code and reduce corporate and individual tax rates. However, to remain revenue neutral, the Camp Proposal would eliminate many important tax incentives and would change the landscape of executive compensation.

Changes to Nonqualified Deferred Compensation

Most significantly, the Camp Proposal would add a new Internal Revenue Code Section 409B under which nonqualified deferred compensation earned after 2014 would be taxed upon the elimination of a substantial risk of forfeiture (typically, upon vesting). Further, under the Camp Proposal, amounts earned before 2015 would generally be includible in income as of the later of: (1) 2022 or (2) the year in which the amounts are no longer subject to a substantial risk of forfeiture. If these provisions are enacted, there would no longer be any tax-advantaged reason to use non-qualified deferred compensation plans and, as a result, there would be an incentive to discontinue them unless they are funded.

Changes to Internal Revenue Code Section 162(m)

Section 162(m) currently limits to $1 million the deduction that public companies may take on the compensation paid to the chief executive officer and the next three highest paid officers. In addition:

  • Chief financial officers generally are not subject to Section 162(m) due to a change in SEC proxy disclosure rules in 2007.
  • Payments that qualify as performance-based compensation under Section 162(m) are not subject to the $1 million limit.
  • The limit only applies to named executive officers in the company’s proxy who are employed by the company on the last day of the company’s fiscal year.

The Camp Proposal would expand the application of Section 162(m) to:

  • Cover the chief financial officer
  • Eliminate the performance-based compensation exception (so that items like stock options and other performance-based pay would, for the first time, become subject to the $1 million cap)
  • Continue to apply the deduction limit to former covered officers and to beneficiaries (which would eliminate the approach of preserving deductions by deferring amounts until Section 162(m) officers terminate employment)

The Camp Proposal’s Section 162(m) provisions remove significant tax incentives to provide compensation in certain types of ways, in particular, to meet the definition of performance-based compensation. While the early consensus appears to be the proposal will not affect the movement toward pay-for-performance for other purposes (e.g., for shareholder “say on pay” votes, etc.), it likely will affect the vehicles and approaches used to implement pay-for-performance. For example, companies may no longer feel compelled to set performance metrics during the first 90 days of a performance period as many companies now do in order to qualify for the existing performance-based exception to Section 162(m).

The Camp Proposal, in its current form, is highly unlikely to be enacted this year. However, these executive compensation provisions (or similar provisions) are attractive revenue raisers that could be used to pay for [...]

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