More than five months after the adoption of comprehensive tax reform and the repeal of the performance-based pay exception to Section 162(m) of the Internal Revenue Code, companies are still waiting for IRS guidance which will address how the agency will apply the grandfather clause included in the repeal of the performance-pay exception. The clause exempts agreements which were in effect and unaltered prior to November 2, 2017 from the 162(m) changes.
- Recently there has been increasing dialogue about the grandfather provision centered around the use of compensation committee discretion to reduce executive pay and whether the use of discretion would nullify a plan's ability to be grandfathered.
- According to the "Tax Cuts and Jobs Act" conference report, if a company’s compensation plan can be terminated by either party, it would be considered a new contract and would not be covered by the grandfather rules.
- There is some concern, therefore, that the use of discretion to decrease or not pay an award would result in the plan not being covered by the grandfather rules.
In a recent American Bar Association Taxation Section conference, practitioners made recommendations on how to approach the use of discretion in light of the lack of clarity for the application of the grandfather clause. As is detailed by Law360, one recommendation focused on avoiding the risk of exercising discretion and forfeiting the grandfather provision by creating a new incentive plan for future awards thus avoiding the risk of accidentally voiding the grandfather clause by exercising discretion under the old plan. Another practitioner cited the 1993 conference report for the original adoption of Section 162(m) and, based on the text regarding transitions, which is nearly identical to that in the 2017 tax act, postulated that the grandfather rules would preserve rights that exist in plans as of November 2, 2017.
The Center will continue to monitor trends stemming from the Section 162(m) changes including the publication of IRS guidance.
